Shenzhen Kaizhong Precision Technology (SZSE:002823) Could Be Struggling To Allocate Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Shenzhen Kaizhong Precision Technology (SZSE:002823), so let's see why.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shenzhen Kaizhong Precision Technology, this is the formula:

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

0.031 = CN¥74m ÷ (CN¥3.8b - CN¥1.4b) (Based on the trailing twelve months to September 2023).

So, Shenzhen Kaizhong Precision Technology has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.6%.

Check out our latest analysis for Shenzhen Kaizhong Precision Technology

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Shenzhen Kaizhong Precision Technology, given the returns are trending downwards. To be more specific, the ROCE was 9.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Shenzhen Kaizhong Precision Technology becoming one if things continue as they have.

Our Take On Shenzhen Kaizhong Precision Technology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. 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 Shenzhen Kaizhong Precision Technology (2 are concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.