Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)

0.046 = CN¥8.3m ÷ (CN¥194m - CN¥14m) (Based on the trailing twelve months to March 2024).

So, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.2%.

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 Shanghai Qingpu Fire-Fighting Equipment's past earnings, revenue and cash flow.

The Trend Of ROCE

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. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Shanghai Qingpu Fire-Fighting Equipment is utilizing 104% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 7.2%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

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

In summary, it's great to see that Shanghai Qingpu Fire-Fighting Equipment has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 66% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for Shanghai Qingpu Fire-Fighting Equipment you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.