Be Wary Of Shenzhen Ridge Engineering Consulting (SZSE:300977) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shenzhen Ridge Engineering Consulting (SZSE:300977), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shenzhen Ridge Engineering Consulting is:

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

0.0086 = CN¥12m ÷ (CN¥1.5b - CN¥76m) (Based on the trailing twelve months to March 2024).

So, Shenzhen Ridge Engineering Consulting has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.4%.

Check out our latest analysis for Shenzhen Ridge Engineering Consulting

Above you can see how the current ROCE for Shenzhen Ridge Engineering Consulting 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 Shenzhen Ridge Engineering Consulting for free.

How Are Returns Trending?

When we looked at the ROCE trend at Shenzhen Ridge Engineering Consulting, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 57% five years ago. 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.

On a related note, Shenzhen Ridge Engineering Consulting has decreased its current liabilities to 5.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On Shenzhen Ridge Engineering Consulting's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Ridge Engineering Consulting have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 43% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Shenzhen Ridge Engineering Consulting (1 shouldn't be ignored) you should be aware of.

While Shenzhen Ridge Engineering Consulting 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.