Returns On Capital At Shanghai Industrial Holdings (HKG:363) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Industrial Holdings (HKG:363) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shanghai Industrial Holdings is:

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

0.055 = HK$7.9b ÷ (HK$211b - HK$67b) (Based on the trailing twelve months to June 2021).

Therefore, Shanghai Industrial Holdings has an ROCE of 5.5%. On its own that's a low return, but compared to the average of 3.5% generated by the Industrials industry, it's much better.

Check out our latest analysis for Shanghai Industrial Holdings

In the above chart we have measured Shanghai Industrial Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Industrial Holdings.

What Does the ROCE Trend For Shanghai Industrial Holdings Tell Us?

In terms of Shanghai Industrial Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.5% for the last five years, and the capital employed within the business has risen 48% 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 Key Takeaway

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 21% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shanghai Industrial Holdings has the makings of a multi-bagger.

Shanghai Industrial Holdings does have some risks though, and we've spotted 1 warning sign for Shanghai Industrial Holdings that you might be interested in.

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. 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.