Shanghai Shentong MetroLtd's (SHSE:600834) Returns On Capital Are Heading Higher

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Shanghai Shentong MetroLtd (SHSE:600834) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Shanghai Shentong MetroLtd is:

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

0.045 = CN¥82m ÷ (CN¥2.4b - CN¥577m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Shentong MetroLtd has an ROCE of 4.5%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

Check out our latest analysis for Shanghai Shentong MetroLtd

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

The Trend Of ROCE

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 106% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Shanghai Shentong MetroLtd appears to been achieving more with less, since the business is using 30% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

In the end, Shanghai Shentong MetroLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Shanghai Shentong MetroLtd and understanding this should be part of your investment process.

While Shanghai Shentong MetroLtd 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.