The Returns At Shanghai Industrial Holdings (HKG:363) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. 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.

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)

0.064 = HK$8.7b ÷ (HK$195b - HK$61b) (Based on the trailing twelve months to June 2022).

Therefore, Shanghai Industrial Holdings has an ROCE of 6.4%. On its own that's a low return, but compared to the average of 3.1% generated by the Industrials industry, it's much better.

View 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 to see what analysts are forecasting going forward, you should check out our free report for Shanghai Industrial Holdings.

The Trend Of ROCE

Over the past five years, Shanghai Industrial Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Shanghai Industrial Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Shanghai Industrial Holdings' ROCE

In summary, Shanghai Industrial Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. Therefore based on the analysis done in this article, we don't think Shanghai Industrial Holdings has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Shanghai Industrial Holdings (2 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.