Return Trends At Shanghai Industrial Holdings (HKG:363) Aren't Appealing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shanghai Industrial Holdings (HKG:363) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Shanghai Industrial Holdings:

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

0.048 = HK$6.4b ÷ (HK$195b - HK$61b) (Based on the trailing twelve months to December 2020).

Therefore, Shanghai Industrial Holdings has an ROCE of 4.8%. On its own that's a low return, but compared to the average of 3.4% generated by the Industrials industry, it's much better.

Check out our latest analysis for Shanghai Industrial Holdings

Above you can see how the current ROCE for Shanghai Industrial Holdings 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 Industrial Holdings here for free.

What Can We Tell From Shanghai Industrial Holdings' ROCE Trend?

There are better returns on capital out there than what we're seeing at Shanghai Industrial Holdings. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 39% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Shanghai Industrial Holdings' ROCE

Long story short, while Shanghai Industrial Holdings has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shanghai Industrial Holdings (of which 1 can't be ignored!) that you should know about.

While Shanghai Industrial Holdings 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. 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.
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