Capital Allocation Trends At Shenzhen Han's CNC Technology (SZSE:301200) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen Han's CNC Technology (SZSE:301200), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shenzhen Han's CNC Technology is:

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

0.015 = CN¥75m ÷ (CN¥6.7b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Han's CNC Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

See our latest analysis for Shenzhen Han's CNC Technology

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 Shenzhen Han's CNC Technology's past further, check out this free graph covering Shenzhen Han's CNC Technology's past earnings, revenue and cash flow.

So How Is Shenzhen Han's CNC Technology's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Han's CNC Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 21% five years ago. However it looks like Shenzhen Han's CNC Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Shenzhen Han's CNC Technology's ROCE

To conclude, we've found that Shenzhen Han's CNC Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shenzhen Han's CNC Technology has the makings of a multi-bagger.

If you'd like to know more about Shenzhen Han's CNC Technology, we've spotted 4 warning signs, and 2 of them make us uncomfortable.

While Shenzhen Han's CNC Technology 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.

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