Shandong Liancheng Precision Manufacturing (SZSE:002921) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shandong Liancheng Precision Manufacturing (SZSE:002921) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Shandong Liancheng Precision Manufacturing, this is the formula:

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

0.026 = CN¥41m ÷ (CN¥2.2b - CN¥678m) (Based on the trailing twelve months to September 2023).

Thus, Shandong Liancheng Precision Manufacturing has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.6%.

Check out our latest analysis for Shandong Liancheng Precision Manufacturing

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

What Can We Tell From Shandong Liancheng Precision Manufacturing's ROCE Trend?

In terms of Shandong Liancheng Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.3% over the last five years. 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.

Our Take On Shandong Liancheng Precision Manufacturing's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shandong Liancheng Precision Manufacturing have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Shandong Liancheng Precision Manufacturing we've found 5 warning signs (3 are a bit unpleasant!) that you should be aware of before investing here.

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.