Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.03 = CN¥2.6m ÷ (CN¥109m - CN¥22m) (Based on the trailing twelve months to March 2021).

Thus, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.2%.

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.

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

We're delighted to see that Shanghai Qingpu Fire-Fighting Equipment is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

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. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Shanghai Qingpu Fire-Fighting Equipment does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) 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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