Silkroad Visual Technology (SZSE:300556) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Silkroad Visual Technology (SZSE:300556) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Silkroad Visual Technology, this is the formula:

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

0.00013 = CN¥153k ÷ (CN¥2.0b - CN¥816m) (Based on the trailing twelve months to March 2024).

Therefore, Silkroad Visual Technology has an ROCE of 0.01%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 5.7%.

Check out our latest analysis for Silkroad Visual 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Silkroad Visual Technology.

What Does the ROCE Trend For Silkroad Visual Technology Tell Us?

On the surface, the trend of ROCE at Silkroad Visual Technology doesn't inspire confidence. Around five years ago the returns on capital were 4.4%, but since then they've fallen to 0.01%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Silkroad Visual Technology's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, Silkroad Visual Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Silkroad Visual Technology has the makings of a multi-bagger.

Silkroad Visual Technology does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Silkroad Visual 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.