Senci Electric MachineryLtd (SHSE:603109) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Senci Electric MachineryLtd (SHSE:603109) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Senci Electric MachineryLtd:

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

0.083 = CN¥184m ÷ (CN¥3.3b - CN¥1.0b) (Based on the trailing twelve months to September 2024).

Therefore, Senci Electric MachineryLtd has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 5.8% generated by the Electrical industry, it's much better.

View our latest analysis for Senci Electric MachineryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Senci Electric MachineryLtd's ROCE against it's prior returns. If you're interested in investigating Senci Electric MachineryLtd's past further, check out this free graph covering Senci Electric MachineryLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Senci Electric MachineryLtd Tell Us?

On the surface, the trend of ROCE at Senci Electric MachineryLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.3% from 16% five years ago. However it looks like Senci Electric MachineryLtd 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.

Our Take On Senci Electric MachineryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Senci Electric MachineryLtd's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Senci Electric MachineryLtd (including 1 which is a bit unpleasant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.