The Return Trends At Shenzhen Envicool Technology (SZSE:002837) Look Promising

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Shenzhen Envicool Technology (SZSE:002837) so let's look a bit deeper.

What Is 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 Shenzhen Envicool Technology is:

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

0.18 = CN¥492m ÷ (CN¥5.1b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Envicool Technology has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Machinery industry.

See our latest analysis for Shenzhen Envicool Technology

In the above chart we have measured Shenzhen Envicool Technology'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 Shenzhen Envicool Technology for free.

What Does the ROCE Trend For Shenzhen Envicool Technology Tell Us?

Investors would be pleased with what's happening at Shenzhen Envicool Technology. The data shows that returns on capital have increased substantially over the last five years to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 141%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Shenzhen Envicool Technology has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Shenzhen Envicool Technology's ROCE

To sum it up, Shenzhen Envicool Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Shenzhen Envicool Technology you'll probably want to know about.

While Shenzhen Envicool Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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