Returns On Capital Signal Tricky Times Ahead For Roshow Technology (SZSE:002617)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Roshow Technology (SZSE:002617), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Roshow Technology is:

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

0.03 = CN¥251m ÷ (CN¥10b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

Therefore, Roshow Technology has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.

Check out our latest analysis for Roshow Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Roshow Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Roshow Technology.

What Does the ROCE Trend For Roshow Technology Tell Us?

In terms of Roshow Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Roshow Technology has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Roshow Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Roshow Technology have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Roshow Technology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002617 on our platform quite valuable.

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.

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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.