Shenzhen Sosen ElectronicsLtd (SZSE:301002) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Shenzhen Sosen ElectronicsLtd (SZSE:301002) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Shenzhen Sosen ElectronicsLtd, this is the formula:

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

0.013 = CN¥14m ÷ (CN¥1.5b - CN¥340m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Sosen ElectronicsLtd has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

View our latest analysis for Shenzhen Sosen ElectronicsLtd

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

How Are Returns Trending?

On the surface, the trend of ROCE at Shenzhen Sosen ElectronicsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 53% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Shenzhen Sosen ElectronicsLtd has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. 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

We're a bit apprehensive about Shenzhen Sosen ElectronicsLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Shenzhen Sosen ElectronicsLtd, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.