Some Investors May Be Worried About Shanghai Allied Industrial's (SZSE:301419) Returns On Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Shanghai Allied Industrial (SZSE:301419), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Shanghai Allied Industrial is:

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

0.016 = CN¥15m ÷ (CN¥1.0b - CN¥82m) (Based on the trailing twelve months to September 2024).

So, Shanghai Allied Industrial has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Shanghai Allied Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Allied Industrial's ROCE against it's prior returns. If you're interested in investigating Shanghai Allied Industrial's past further, check out this free graph covering Shanghai Allied Industrial's past earnings, revenue and cash flow.

What Can We Tell From Shanghai Allied Industrial's ROCE Trend?

When we looked at the ROCE trend at Shanghai Allied Industrial, we didn't gain much confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 1.6%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Shanghai Allied Industrial has done well to pay down its current liabilities to 8.1% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

We're a bit apprehensive about Shanghai Allied Industrial because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Shanghai Allied Industrial (of which 2 can't be ignored!) that you should know about.

While Shanghai Allied Industrial 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.