Investors Could Be Concerned With Shenzhen JT Automation EquipmentLtd's (SZSE:300400) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen JT Automation EquipmentLtd (SZSE:300400), it didn't seem to tick all of these boxes.

What Is 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 JT Automation EquipmentLtd, this is the formula:

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

0.028 = CN¥25m ÷ (CN¥1.2b - CN¥345m) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen JT Automation EquipmentLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

View our latest analysis for Shenzhen JT Automation EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen JT Automation EquipmentLtd's ROCE against it's prior returns. If you'd like to look at how Shenzhen JT Automation EquipmentLtd has performed in the past in other metrics, you can view this free graph of Shenzhen JT Automation EquipmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen JT Automation EquipmentLtd's ROCE Trend?

When we looked at the ROCE trend at Shenzhen JT Automation EquipmentLtd, we didn't gain much confidence. Around five years ago the returns on capital were 8.0%, but since then they've fallen to 2.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Shenzhen JT Automation EquipmentLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 16% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Shenzhen JT Automation EquipmentLtd, we've spotted 4 warning signs, and 2 of them can't be ignored.

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.