Shanghai Dazhong Public Utilities(Group)Ltd (SHSE:600635) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So on that note, Shanghai Dazhong Public Utilities(Group)Ltd (SHSE:600635) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Shanghai Dazhong Public Utilities(Group)Ltd:

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

0.02 = CN¥295m ÷ (CN¥23b - CN¥8.2b) (Based on the trailing twelve months to March 2024).

So, Shanghai Dazhong Public Utilities(Group)Ltd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 9.0%.

View 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.

The Trend Of ROCE

Shareholders will be relieved that Shanghai Dazhong Public Utilities(Group)Ltd has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.0%, which is always encouraging. While returns have increased, the amount of capital employed by Shanghai Dazhong Public Utilities(Group)Ltd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To bring it all together, Shanghai Dazhong Public Utilities(Group)Ltd has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 59% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 3 warning signs with Shanghai Dazhong Public Utilities(Group)Ltd and understanding these should be part of your investment process.

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.