Returns On Capital At Qingdao Richmat Intelligence Technology (SZSE:301320) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Qingdao Richmat Intelligence Technology (SZSE:301320) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Qingdao Richmat Intelligence Technology is:

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

0.037 = CN¥40m ÷ (CN¥1.4b - CN¥353m) (Based on the trailing twelve months to March 2024).

So, Qingdao Richmat Intelligence Technology has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Qingdao Richmat Intelligence 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 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. Around five years ago the returns on capital were 37%, but since then they've fallen to 3.7%. 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, Qingdao Richmat Intelligence Technology has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Qingdao Richmat Intelligence Technology. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Qingdao Richmat Intelligence Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Qingdao Richmat Intelligence 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.