The Return Trends At Shanghai Dazhong Public Utilities(Group)Ltd (SHSE:600635) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.026 = CN¥365m ÷ (CN¥23b - CN¥8.4b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Dazhong Public Utilities(Group)Ltd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 8.6%.

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.

So How Is Shanghai Dazhong Public Utilities(Group)Ltd's ROCE Trending?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 487% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Shanghai Dazhong Public Utilities(Group)Ltd's ROCE

As discussed above, Shanghai Dazhong Public Utilities(Group)Ltd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with Shanghai Dazhong Public Utilities(Group)Ltd (at least 3 which are significant) , and understanding these would certainly be useful.

While Shanghai Dazhong Public Utilities(Group)Ltd 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.