Shanghai Holystar Information Technology's (SHSE:688330) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shanghai Holystar Information Technology (SHSE:688330), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Holystar Information Technology, this is the formula:

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

0.041 = CN¥152m ÷ (CN¥4.1b - CN¥419m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Holystar Information Technology has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

See our latest analysis for Shanghai Holystar Information Technology

Above you can see how the current ROCE for Shanghai Holystar Information Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Holystar Information Technology .

What Does the ROCE Trend For Shanghai Holystar Information Technology Tell Us?

In terms of Shanghai Holystar Information Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 4.1%. However it looks like Shanghai Holystar Information Technology 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shanghai Holystar Information Technology has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Shanghai Holystar Information Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 60% in the last three years. Therefore based on the analysis done in this article, we don't think Shanghai Holystar Information Technology has the makings of a multi-bagger.

If you want to know some of the risks facing Shanghai Holystar Information Technology we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Shanghai Holystar Information Technology 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.