Tangshan Sunfar Silicon IndustriesLtd's (SHSE:603938) Returns On Capital Not Reflecting Well On The Business

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Tangshan Sunfar Silicon IndustriesLtd (SHSE:603938) 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?

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 Tangshan Sunfar Silicon IndustriesLtd:

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

0.054 = CN¥147m ÷ (CN¥3.2b - CN¥480m) (Based on the trailing twelve months to March 2024).

Thus, Tangshan Sunfar Silicon IndustriesLtd has an ROCE of 5.4%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for Tangshan Sunfar Silicon IndustriesLtd

In the above chart we have measured Tangshan Sunfar Silicon IndustriesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tangshan Sunfar Silicon IndustriesLtd for free.

What Can We Tell From Tangshan Sunfar Silicon IndustriesLtd's ROCE Trend?

When we looked at the ROCE trend at Tangshan Sunfar Silicon IndustriesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 5.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Tangshan Sunfar Silicon IndustriesLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Tangshan Sunfar Silicon IndustriesLtd have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 64% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Tangshan Sunfar Silicon IndustriesLtd, we've discovered 2 warning signs that you should be aware of.

While Tangshan Sunfar Silicon IndustriesLtd 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.

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