Shenzhen Capol International & Associatesco.Ltd (SZSE:002949) Might Be Having Difficulty Using Its Capital Effectively

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. 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 Capol International & Associatesco.Ltd (SZSE:002949) 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)?

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 Capol International & Associatesco.Ltd:

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

0.082 = CN¥172m ÷ (CN¥3.1b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Capol International & Associatesco.Ltd has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 5.7% generated by the Professional Services industry, it's much better.

View our latest analysis for Shenzhen Capol International & Associatesco.Ltd

Above you can see how the current ROCE for Shenzhen Capol International & Associatesco.Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Capol International & Associatesco.Ltd .

The Trend Of ROCE

On the surface, the trend of ROCE at Shenzhen Capol International & Associatesco.Ltd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Shenzhen Capol International & Associatesco.Ltd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Capol International & Associatesco.Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 46% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shenzhen Capol International & Associatesco.Ltd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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

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.