Returns At Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Are On The Way Up

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai Qingpu Fire-Fighting Equipment:

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

0.022 = CN¥3.7m ÷ (CN¥181m - CN¥14m) (Based on the trailing twelve months to December 2022).

So, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

View 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.

So How Is Shanghai Qingpu Fire-Fighting Equipment's ROCE Trending?

We're delighted to see that Shanghai Qingpu Fire-Fighting Equipment is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.2% which is a sight for sore eyes. In addition to that, Shanghai Qingpu Fire-Fighting Equipment is employing 84% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 7.9%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

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

Long story short, we're delighted to see that Shanghai Qingpu Fire-Fighting Equipment's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 35% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Shanghai Qingpu Fire-Fighting Equipment does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.