Be Wary Of Sichuan Tianwei ElectronicLtd (SHSE:688511) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sichuan Tianwei ElectronicLtd (SHSE:688511) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sichuan Tianwei ElectronicLtd:

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

0.056 = CN¥48m ÷ (CN¥908m - CN¥59m) (Based on the trailing twelve months to December 2023).

Thus, Sichuan Tianwei ElectronicLtd has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.4% average generated by the Aerospace & Defense industry.

Check out our latest analysis for Sichuan Tianwei ElectronicLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sichuan Tianwei ElectronicLtd has performed in the past in other metrics, you can view this free graph of Sichuan Tianwei ElectronicLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Sichuan Tianwei ElectronicLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.1% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sichuan Tianwei ElectronicLtd has done well to pay down its current liabilities to 6.5% 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 Bottom Line On Sichuan Tianwei ElectronicLtd's ROCE

While returns have fallen for Sichuan Tianwei ElectronicLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 41% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with Sichuan Tianwei ElectronicLtd (including 1 which shouldn't be ignored) .

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.

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.