Sinopec Shanghai Petrochemical (HKG:338) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Sinopec Shanghai Petrochemical (HKG:338) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Sinopec Shanghai Petrochemical, this is the formula:

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

0.092 = CN¥2.8b ÷ (CN¥47b - CN¥17b) (Based on the trailing twelve months to June 2021).

So, Sinopec Shanghai Petrochemical has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

Check out our latest analysis for Sinopec Shanghai Petrochemical

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Sinopec Shanghai Petrochemical doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Sinopec Shanghai Petrochemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Sinopec Shanghai Petrochemical's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 1 warning sign for Sinopec Shanghai Petrochemical you'll probably want to 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.

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.

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