Here's What To Make Of Sineng ElectricLtd's (SZSE:300827) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. That's why when we briefly looked at Sineng ElectricLtd's (SZSE:300827) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 Sineng ElectricLtd is:

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

0.19 = CN¥421m ÷ (CN¥7.4b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

So, Sineng ElectricLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

View our latest analysis for Sineng ElectricLtd

Above you can see how the current ROCE for Sineng ElectricLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sineng ElectricLtd for free.

What Can We Tell From Sineng ElectricLtd's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 413% more capital into its operations. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Sineng ElectricLtd's current liabilities are still rather high at 70% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

The main thing to remember is that Sineng ElectricLtd has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 11% over the last three years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Like most companies, Sineng ElectricLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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.