Returns On Capital At Shenzhen Colibri Technologies (SZSE:002957) Paint A Concerning Picture

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shenzhen Colibri Technologies (SZSE:002957) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Colibri Technologies:

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

0.085 = CN¥283m ÷ (CN¥5.5b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Colibri Technologies has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.2%.

Check out our latest analysis for Shenzhen Colibri Technologies

In the above chart we have measured Shenzhen Colibri Technologies' 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 Colibri Technologies .

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 32%. That being said, Shenzhen Colibri Technologies raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Colibri Technologies probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Shenzhen Colibri Technologies' ROCE

In summary, we're somewhat concerned by Shenzhen Colibri Technologies' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 51% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Shenzhen Colibri Technologies, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shenzhen Colibri Technologies 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.

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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.