Be Wary Of Shenzhen V&T Technologies (SZSE:300484) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Shenzhen V&T Technologies (SZSE:300484), we weren't too upbeat about how things were going.

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. The formula for this calculation on Shenzhen V&T Technologies is:

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

0.022 = CN¥15m ÷ (CN¥839m - CN¥170m) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen V&T Technologies has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

View our latest analysis for Shenzhen V&T Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen V&T Technologies has performed in the past in other metrics, you can view this free graph of Shenzhen V&T Technologies' past earnings, revenue and cash flow.

So How Is Shenzhen V&T Technologies' ROCE Trending?

There is reason to be cautious about Shenzhen V&T Technologies, given the returns are trending downwards. About five years ago, returns on capital were 4.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shenzhen V&T Technologies to turn into a multi-bagger.

On a related note, Shenzhen V&T Technologies has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Shenzhen V&T Technologies' ROCE

In summary, it's unfortunate that Shenzhen V&T Technologies is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 27% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Shenzhen V&T Technologies, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

While Shenzhen V&T 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.