Shanghai Morn Electric Equipment (SZSE:002451) May Have Issues Allocating Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Shanghai Morn Electric Equipment (SZSE:002451), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Morn Electric Equipment is:

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

0.019 = CN¥18m ÷ (CN¥1.6b - CN¥650m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Morn Electric Equipment has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

View our latest analysis for Shanghai Morn Electric Equipment

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Shanghai Morn Electric Equipment. To be more specific, the ROCE was 3.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shanghai Morn Electric Equipment becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Shanghai Morn Electric Equipment is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 54% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Shanghai Morn Electric Equipment (2 are a bit unpleasant) you should be aware of.

While Shanghai Morn Electric Equipment 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.