Returns On Capital Are Showing Encouraging Signs At Shanghai Qingpu Fire-Fighting Equipment (HKG:8115)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Shanghai Qingpu Fire-Fighting Equipment's (HKG:8115) returns on capital, so let's have a look.

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. 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)

0.022 = CN¥2.0m ÷ (CN¥112m - CN¥24m) (Based on the trailing twelve months to June 2021).

So, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

View 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'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.

The Trend Of ROCE

Shareholders will be relieved that Shanghai Qingpu Fire-Fighting Equipment has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.2% 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

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

As discussed above, Shanghai Qingpu Fire-Fighting Equipment appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 69% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 3 warning signs with Shanghai Qingpu Fire-Fighting Equipment and understanding these should be part of your investment process.

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.

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.

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