What Do The Returns At Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Shanghai Qingpu Fire-Fighting Equipment, this is the formula:

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

0.011 = CN¥848k ÷ (CN¥101m - CN¥21m) (Based on the trailing twelve months to September 2020).

Thus, Shanghai Qingpu Fire-Fighting Equipment has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.9%.

See 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're interested in investigating Shanghai Qingpu Fire-Fighting Equipment's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shanghai Qingpu Fire-Fighting Equipment has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.1%, which is always encouraging. 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. 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

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. And since the stock has fallen 48% 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 identified 2 warning signs with Shanghai Qingpu Fire-Fighting Equipment (at least 1 which is significant) , and understanding them would certainly be useful.

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. 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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