Some Investors May Be Worried About Shenzhen Megmeet Electrical's (SZSE:002851) Returns On Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shenzhen Megmeet Electrical (SZSE:002851) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Megmeet Electrical is:

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

0.063 = CN¥366m ÷ (CN¥9.5b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Megmeet Electrical has an ROCE of 6.3%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

See our latest analysis for Shenzhen Megmeet Electrical

In the above chart we have measured Shenzhen Megmeet Electrical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Megmeet Electrical .

How Are Returns Trending?

When we looked at the ROCE trend at Shenzhen Megmeet Electrical, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.3% from 13% five years ago. 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.

Our Take On Shenzhen Megmeet Electrical's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Megmeet Electrical is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 10% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Shenzhen Megmeet Electrical, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.