There Are Reasons To Feel Uneasy About Shengtak New Material's (SZSE:300881) Returns On Capital

Simply Wall St · 10/16 03:03

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Shengtak New Material (SZSE:300881), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shengtak New Material, this is the formula:

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

0.18 = CN¥232m ÷ (CN¥3.1b - CN¥1.8b) (Based on the trailing twelve months to June 2024).

Thus, Shengtak New Material has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Metals and Mining industry.

Check out our latest analysis for Shengtak New Material

roce
SZSE:300881 Return on Capital Employed October 16th 2024

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shengtak New Material's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shengtak New Material.

The Trend Of ROCE

On the surface, the trend of ROCE at Shengtak New Material doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Shengtak New Material has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shengtak New Material's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shengtak New Material is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 29% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shengtak New Material (of which 1 is potentially serious!) that you should know about.

While Shengtak New Material 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.