EMTEK (Shenzhen) (SZSE:300938) 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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at EMTEK (Shenzhen) (SZSE:300938) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for EMTEK (Shenzhen):

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

0.10 = CN¥189m ÷ (CN¥2.0b - CN¥157m) (Based on the trailing twelve months to March 2024).

So, EMTEK (Shenzhen) has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Professional Services industry.

View our latest analysis for EMTEK (Shenzhen)

Historical performance is a great place to start when researching a stock so above you can see the gauge for EMTEK (Shenzhen)'s ROCE against it's prior returns. If you'd like to look at how EMTEK (Shenzhen) has performed in the past in other metrics, you can view this free graph of EMTEK (Shenzhen)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For EMTEK (Shenzhen) Tell Us?

In terms of EMTEK (Shenzhen)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for EMTEK (Shenzhen) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for EMTEK (Shenzhen) you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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