Returns On Capital Signal Tricky Times Ahead For Shenzhen Changhong Technology (SZSE:300151)

Simply Wall St · 10/18 22:45

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at Shenzhen Changhong Technology (SZSE:300151) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Shenzhen Changhong Technology:

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

0.013 = CN¥29m ÷ (CN¥2.5b - CN¥292m) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Changhong Technology has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Shenzhen Changhong Technology

roce
SZSE:300151 Return on Capital Employed October 18th 2024

In the above chart we have measured Shenzhen Changhong Technology'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 analyst report for Shenzhen Changhong Technology .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 5.6% five years ago, while capital employed has grown 151%. That being said, Shenzhen Changhong Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shenzhen Changhong Technology's earnings and if they change as a result from the capital raise.

The Bottom Line On Shenzhen Changhong Technology's ROCE

We're a bit apprehensive about Shenzhen Changhong Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 140% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Shenzhen Changhong Technology (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.