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

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.0089 = CN¥777k ÷ (CN¥112m - CN¥24m) (Based on the trailing twelve months to September 2021).

Therefore, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 9.4%.

Check out 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 The Trend Of ROCE Can 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. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% 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. 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. Because in the end, a business can only get so efficient.

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

To sum it up, Shanghai Qingpu Fire-Fighting Equipment is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 59% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 3 warning signs facing Shanghai Qingpu Fire-Fighting Equipment that you might find interesting.

While Shanghai Qingpu Fire-Fighting Equipment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.