Investors Could Be Concerned With Sinopec Shanghai Petrochemical's (HKG:338) Returns On Capital

By
Simply Wall St
Published
April 11, 2022
SEHK:338
Source: Shutterstock

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sinopec Shanghai Petrochemical (HKG:338), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sinopec Shanghai Petrochemical:

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

0.059 = CN¥1.8b ÷ (CN¥47b - CN¥16b) (Based on the trailing twelve months to December 2021).

So, Sinopec Shanghai Petrochemical has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Sinopec Shanghai Petrochemical

roce
SEHK:338 Return on Capital Employed April 11th 2022

In the above chart we have measured Sinopec Shanghai Petrochemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sinopec Shanghai Petrochemical.

What The Trend Of ROCE Can Tell Us

In terms of Sinopec Shanghai Petrochemical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 28% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Sinopec Shanghai Petrochemical in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 49% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Sinopec Shanghai Petrochemical does have some risks though, and we've spotted 1 warning sign for Sinopec Shanghai Petrochemical that you might be interested in.

While Sinopec Shanghai Petrochemical 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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