Returns On Capital Are Showing Encouraging Signs At Shanghai Dazhong Public Utilities(Group)Ltd (SHSE:600635)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shanghai Dazhong Public Utilities(Group)Ltd (SHSE:600635) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Dazhong Public Utilities(Group)Ltd, this is the formula:

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

0.019 = CN¥281m ÷ (CN¥23b - CN¥8.0b) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Dazhong Public Utilities(Group)Ltd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 9.0%.

Check out our latest analysis for Shanghai Dazhong Public Utilities(Group)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Dazhong Public Utilities(Group)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Dazhong Public Utilities(Group)Ltd.

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Shanghai Dazhong Public Utilities(Group)Ltd promising. The figures show that over the last five years, ROCE has grown 1,044% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Shanghai Dazhong Public Utilities(Group)Ltd's ROCE

To sum it up, Shanghai Dazhong Public Utilities(Group)Ltd is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Shanghai Dazhong Public Utilities(Group)Ltd, we've spotted 4 warning signs, and 3 of them don't sit too well with us.

While Shanghai Dazhong Public Utilities(Group)Ltd 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.