There Are Reasons To Feel Uneasy About Shandong Shanda OumasoftLTD's (SZSE:301185) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Shandong Shanda OumasoftLTD (SZSE:301185), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shandong Shanda OumasoftLTD is:

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

0.054 = CN¥56m ÷ (CN¥1.1b - CN¥36m) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Shanda OumasoftLTD has an ROCE of 5.4%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.8%.

See our latest analysis for Shandong Shanda OumasoftLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Shanda OumasoftLTD's ROCE against it's prior returns. If you'd like to look at how Shandong Shanda OumasoftLTD has performed in the past in other metrics, you can view this free graph of Shandong Shanda OumasoftLTD's past earnings, revenue and cash flow.

So How Is Shandong Shanda OumasoftLTD's ROCE Trending?

When we looked at the ROCE trend at Shandong Shanda OumasoftLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Shandong Shanda OumasoftLTD's ROCE

Bringing it all together, while we're somewhat encouraged by Shandong Shanda OumasoftLTD's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shandong Shanda OumasoftLTD has the makings of a multi-bagger.

If you want to continue researching Shandong Shanda OumasoftLTD, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shandong Shanda OumasoftLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.