Shanghai Zhonggu Logistics (SHSE:603565) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shanghai Zhonggu Logistics (SHSE:603565) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Shanghai Zhonggu Logistics:

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

0.059 = CN¥1.1b ÷ (CN¥24b - CN¥6.0b) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Zhonggu Logistics has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Shipping industry average of 7.4%.

Check out our latest analysis for Shanghai Zhonggu Logistics

Above you can see how the current ROCE for Shanghai Zhonggu Logistics 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 Shanghai Zhonggu Logistics for free.

So How Is Shanghai Zhonggu Logistics' ROCE Trending?

When we looked at the ROCE trend at Shanghai Zhonggu Logistics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Shanghai Zhonggu Logistics is reinvesting in the business, but returns have been falling. Since the stock has declined 36% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shanghai Zhonggu Logistics has the makings of a multi-bagger.

Shanghai Zhonggu Logistics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Shanghai Zhonggu Logistics 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.