Capital Allocation Trends At ShenZhen QiangRui Precision Technology (SZSE:301128) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at ShenZhen QiangRui Precision Technology (SZSE:301128) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ShenZhen QiangRui Precision Technology is:

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

0.053 = CN¥50m ÷ (CN¥1.3b - CN¥301m) (Based on the trailing twelve months to March 2024).

So, ShenZhen QiangRui Precision Technology has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.6% average generated by the Machinery industry.

View our latest analysis for ShenZhen QiangRui Precision Technology

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

What Can We Tell From ShenZhen QiangRui Precision Technology's ROCE Trend?

On the surface, the trend of ROCE at ShenZhen QiangRui Precision Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.3% from 36% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, ShenZhen QiangRui Precision Technology has decreased its current liabilities to 24% 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.

The Bottom Line On ShenZhen QiangRui Precision Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ShenZhen QiangRui Precision Technology is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

ShenZhen QiangRui Precision Technology does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) 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.

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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.

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