There Are Reasons To Feel Uneasy About Shenzhen Riland Industry Group's (SZSE:300154) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Shenzhen Riland Industry Group (SZSE:300154) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Riland Industry Group, this is the formula:

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

0.028 = CN¥57m ÷ (CN¥2.6b - CN¥506m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Riland Industry Group has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

See our latest analysis for Shenzhen Riland Industry Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Riland Industry Group'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 Shenzhen Riland Industry Group.

What Does the ROCE Trend For Shenzhen Riland Industry Group Tell Us?

On the surface, the trend of ROCE at Shenzhen Riland Industry Group doesn't inspire confidence. To be more specific, ROCE has fallen from 3.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Shenzhen Riland Industry Group's ROCE

To conclude, we've found that Shenzhen Riland Industry Group is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 130% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Shenzhen Riland Industry Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Shenzhen Riland Industry Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.