Be Wary Of SBT Ultrasonic TechnologyLtd (SHSE:688392) And Its Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at SBT Ultrasonic TechnologyLtd (SHSE:688392) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for SBT Ultrasonic TechnologyLtd:

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

0.035 = CN¥61m ÷ (CN¥2.1b - CN¥371m) (Based on the trailing twelve months to December 2023).

So, SBT Ultrasonic TechnologyLtd has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.2%.

View our latest analysis for SBT Ultrasonic TechnologyLtd

In the above chart we have measured SBT Ultrasonic TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SBT Ultrasonic TechnologyLtd for free.

What Can We Tell From SBT Ultrasonic TechnologyLtd's ROCE Trend?

In terms of SBT Ultrasonic TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 3.5% from 5.0% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that SBT Ultrasonic TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 more thing, we've spotted 2 warning signs facing SBT Ultrasonic TechnologyLtd that you might find interesting.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.