Capital Allocation Trends At Shenzhen Crastal TechnologyLtd (SZSE:300824) Aren't Ideal

What are the early trends we should look for to identify a stock that could 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. Having said that, from a first glance at Shenzhen Crastal TechnologyLtd (SZSE:300824) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shenzhen Crastal TechnologyLtd is:

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

0.073 = CN¥54m ÷ (CN¥905m - CN¥171m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Crastal TechnologyLtd has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

View our latest analysis for Shenzhen Crastal TechnologyLtd

Above you can see how the current ROCE for Shenzhen Crastal TechnologyLtd 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 Crastal TechnologyLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Shenzhen Crastal TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shenzhen Crastal TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 14% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Shenzhen Crastal TechnologyLtd and understanding this should be part of your investment process.

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.