Returns On Capital Signal Tricky Times Ahead For Suzhou Shijing Environmental TechnologyLtd (SZSE:301030)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Suzhou Shijing Environmental TechnologyLtd (SZSE:301030), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Suzhou Shijing Environmental TechnologyLtd, this is the formula:

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

0.049 = CN¥271m ÷ (CN¥11b - CN¥5.5b) (Based on the trailing twelve months to September 2024).

Therefore, Suzhou Shijing Environmental TechnologyLtd has an ROCE of 4.9%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for Suzhou Shijing Environmental TechnologyLtd

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're interested in investigating Suzhou Shijing Environmental TechnologyLtd's past further, check out this free graph covering Suzhou Shijing Environmental TechnologyLtd's past earnings, revenue and cash flow.

So How Is Suzhou Shijing Environmental TechnologyLtd's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 593%. That being said, Suzhou Shijing Environmental TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Suzhou Shijing Environmental TechnologyLtd's earnings and if they change as a result from the capital raise. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

On a side note, Suzhou Shijing Environmental TechnologyLtd's current liabilities are still rather high at 50% 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Suzhou Shijing Environmental TechnologyLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.7% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Suzhou Shijing Environmental TechnologyLtd does have some risks, we noticed 5 warning signs (and 2 which are concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.