Returns On Capital At Shenzhen Minglida Precision Technology (SZSE:301268) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shenzhen Minglida Precision Technology (SZSE:301268) 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. Analysts use this formula to calculate it for Shenzhen Minglida Precision Technology:

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

0.056 = CN¥215m ÷ (CN¥5.4b - CN¥1.5b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Minglida Precision Technology has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

Check out our latest analysis for Shenzhen Minglida Precision Technology

In the above chart we have measured Shenzhen Minglida Precision Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Minglida Precision Technology .

So How Is Shenzhen Minglida Precision Technology's ROCE Trending?

In terms of Shenzhen Minglida Precision Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.6% from 12% five years ago. However it looks like Shenzhen Minglida Precision 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shenzhen Minglida Precision Technology has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shenzhen Minglida Precision Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shenzhen Minglida Precision Technology has the makings of a multi-bagger.

Shenzhen Minglida Precision Technology does have some risks though, and we've spotted 4 warning signs for Shenzhen Minglida Precision Technology that you might be interested in.

While Shenzhen Minglida Precision Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.