Qingdao Richmat Intelligence Technology (SZSE:301320) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Qingdao Richmat Intelligence Technology (SZSE:301320) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Qingdao Richmat Intelligence Technology, this is the formula:

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

0.034 = CN¥37m ÷ (CN¥1.5b - CN¥402m) (Based on the trailing twelve months to September 2024).

So, Qingdao Richmat Intelligence Technology has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Qingdao Richmat Intelligence Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Richmat Intelligence Technology's ROCE against it's prior returns. If you're interested in investigating Qingdao Richmat Intelligence Technology's past further, check out this free graph covering Qingdao Richmat Intelligence Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Qingdao Richmat Intelligence Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.4% from 32% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Qingdao Richmat Intelligence Technology has decreased its current liabilities to 27% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Qingdao Richmat Intelligence Technology's ROCE

To conclude, we've found that Qingdao Richmat Intelligence Technology is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 16% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Qingdao Richmat Intelligence Technology, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.