Some Investors May Be Worried About Universal Scientific Industrial (Shanghai)'s (SHSE:601231) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Universal Scientific Industrial (Shanghai) (SHSE:601231), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Universal Scientific Industrial (Shanghai), this is the formula:

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

0.086 = CN¥1.9b ÷ (CN¥41b - CN¥19b) (Based on the trailing twelve months to September 2024).

Thus, Universal Scientific Industrial (Shanghai) has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

View our latest analysis for Universal Scientific Industrial (Shanghai)

In the above chart we have measured Universal Scientific Industrial (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Universal Scientific Industrial (Shanghai) for free.

What Does the ROCE Trend For Universal Scientific Industrial (Shanghai) Tell Us?

When we looked at the ROCE trend at Universal Scientific Industrial (Shanghai), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.6% from 13% five years ago. 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.

On a side note, Universal Scientific Industrial (Shanghai)'s current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To conclude, we've found that Universal Scientific Industrial (Shanghai) is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 6.5% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Universal Scientific Industrial (Shanghai), we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.