Returns On Capital Signal Tricky Times Ahead For Pylon Technologies (SHSE:688063)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Pylon Technologies (SHSE:688063) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Pylon Technologies:

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

0.059 = CN¥632m ÷ (CN¥12b - CN¥1.7b) (Based on the trailing twelve months to December 2023).

Therefore, Pylon Technologies has an ROCE of 5.9%. On its own, that's a low figure but it's around the 6.5% average generated by the Electrical industry.

See our latest analysis for Pylon Technologies

Above you can see how the current ROCE for Pylon Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pylon Technologies .

How Are Returns Trending?

We weren't thrilled with the trend because Pylon Technologies' ROCE has reduced by 65% over the last five years, while the business employed 4,004% more capital. Usually this isn't ideal, but given Pylon Technologies conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Pylon Technologies might not have received a full period of earnings contribution from it.

On a related note, Pylon Technologies has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, we're somewhat concerned by Pylon Technologies' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 40% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Pylon Technologies (1 is potentially serious) you should be aware of.

While Pylon Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.