Shanghai Suochen Information TechnologyLtd (SHSE:688507) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Shanghai Suochen Information TechnologyLtd (SHSE:688507) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Suochen Information TechnologyLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0037 = CN¥11m ÷ (CN¥3.0b - CN¥119m) (Based on the trailing twelve months to March 2024).

So, Shanghai Suochen Information TechnologyLtd has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Software industry average of 3.0%.

View our latest analysis for Shanghai Suochen Information TechnologyLtd

In the above chart we have measured Shanghai Suochen Information TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Suochen Information TechnologyLtd .

What The Trend Of ROCE Can Tell Us

Shanghai Suochen Information TechnologyLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Shanghai Suochen Information TechnologyLtd is utilizing 862% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.0%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To the delight of most shareholders, Shanghai Suochen Information TechnologyLtd has now broken into profitability. Given the stock has declined 40% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

While Shanghai Suochen Information TechnologyLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 688507 helps visualize whether it is currently trading for a fair price.

While Shanghai Suochen Information TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.