Here’s What’s Happening With Returns At Shanghai Qingpu Fire-Fighting Equipment (HKG:8115)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) looks quite promising in regards to its trends of return on capital.

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 Qingpu Fire-Fighting Equipment, this is the formula:

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

0.011 = CN¥848k ÷ (CN¥101m - CN¥21m) (Based on the trailing twelve months to September 2020).

Therefore, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.7%.

Check out our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

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're interested in investigating Shanghai Qingpu Fire-Fighting Equipment's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shanghai Qingpu Fire-Fighting Equipment has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.1% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Shanghai Qingpu Fire-Fighting Equipment's ROCE

In summary, we're delighted to see that Shanghai Qingpu Fire-Fighting Equipment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 52% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shanghai Qingpu Fire-Fighting Equipment (of which 1 is a bit concerning!) that you should know about.

While Shanghai Qingpu Fire-Fighting Equipment 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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