Investors Will Want Shanghai Qingpu Fire-Fighting Equipment's (HKG:8115) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) so let's look a bit deeper.

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. The formula for this calculation on Shanghai Qingpu Fire-Fighting Equipment is:

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

0.023 = CN¥3.9m ÷ (CN¥184m - CN¥14m) (Based on the trailing twelve months to June 2023).

Therefore, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

See our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Qingpu Fire-Fighting Equipment's ROCE against it's prior returns. If you'd like to look at how Shanghai Qingpu Fire-Fighting Equipment has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Qingpu Fire-Fighting Equipment Tell Us?

Shanghai Qingpu Fire-Fighting Equipment has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Shanghai Qingpu Fire-Fighting Equipment is utilizing 91% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 7.8%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Shanghai Qingpu Fire-Fighting Equipment's ROCE

To the delight of most shareholders, Shanghai Qingpu Fire-Fighting Equipment has now broken into profitability. Since the stock has only returned 1.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 3 warning signs for Shanghai Qingpu Fire-Fighting Equipment that we think 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.