ShenZhen QiangRui Precision Technology (SZSE:301128) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think ShenZhen QiangRui Precision Technology (SZSE:301128) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ShenZhen QiangRui Precision Technology:

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

0.11 = CN¥104m ÷ (CN¥1.4b - CN¥463m) (Based on the trailing twelve months to September 2024).

Therefore, ShenZhen QiangRui Precision Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Machinery industry.

Check out 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're interested in investigating ShenZhen QiangRui Precision Technology's past further, check out this free graph covering 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. Around five years ago the returns on capital were 34%, but since then they've fallen to 11%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On ShenZhen QiangRui Precision Technology's ROCE

While returns have fallen for ShenZhen QiangRui Precision Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 130% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for ShenZhen QiangRui Precision Technology (2 make us uncomfortable) you should be aware of.

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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.