Returns On Capital At Shanghai Lingyun Industries Development (SHSE:900957) Have Hit The Brakes

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shanghai Lingyun Industries Development (SHSE:900957) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Lingyun Industries Development, this is the formula:

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

0.048 = CN¥50m ÷ (CN¥1.1b - CN¥11m) (Based on the trailing twelve months to March 2024).

So, Shanghai Lingyun Industries Development has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.9%.

See our latest analysis for Shanghai Lingyun Industries Development

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shanghai Lingyun Industries Development has performed in the past in other metrics, you can view this free graph of Shanghai Lingyun Industries Development's past earnings, revenue and cash flow.

The Trend Of ROCE

Things have been pretty stable at Shanghai Lingyun Industries Development, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Shanghai Lingyun Industries Development in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

We can conclude that in regards to Shanghai Lingyun Industries Development's returns on capital employed and the trends, there isn't much change to report on. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 72% over the last five years. Therefore based on the analysis done in this article, we don't think Shanghai Lingyun Industries Development has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Shanghai Lingyun Industries Development (2 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com