Here's What's Concerning About Shenzhen Senior Technology Material's (SZSE:300568) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shenzhen Senior Technology Material (SZSE:300568), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shenzhen Senior Technology Material is:

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

0.021 = CN¥339m ÷ (CN¥21b - CN¥4.3b) (Based on the trailing twelve months to September 2024).

So, Shenzhen Senior Technology Material has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Shenzhen Senior Technology Material

Above you can see how the current ROCE for Shenzhen Senior Technology Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Senior Technology Material for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 4.2% five years ago, while the business's capital employed increased by 296%. Usually this isn't ideal, but given Shenzhen Senior Technology Material conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shenzhen Senior Technology Material might not have received a full period of earnings contribution from it.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Senior Technology Material is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 50% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Shenzhen Senior Technology Material does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.