Returns On Capital Signal Tricky Times Ahead For Universal Scientific Industrial (Shanghai) (SHSE:601231)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Universal Scientific Industrial (Shanghai) (SHSE:601231), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Universal Scientific Industrial (Shanghai):

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

0.10 = CN¥2.2b ÷ (CN¥39b - CN¥17b) (Based on the trailing twelve months to March 2024).

Thus, Universal Scientific Industrial (Shanghai) has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.3% it's much better.

View our latest analysis for Universal Scientific Industrial (Shanghai)

Above you can see how the current ROCE for Universal Scientific Industrial (Shanghai) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Universal Scientific Industrial (Shanghai) for free.

So How Is Universal Scientific Industrial (Shanghai)'s ROCE Trending?

In terms of Universal Scientific Industrial (Shanghai)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 10%. However it looks like Universal Scientific Industrial (Shanghai) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Universal Scientific Industrial (Shanghai) has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Universal Scientific Industrial (Shanghai)'s ROCE

To conclude, we've found that Universal Scientific Industrial (Shanghai) is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Universal Scientific Industrial (Shanghai) you'll probably want to know about.

While Universal Scientific Industrial (Shanghai) 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.