The Returns On Capital At Shenzhen Dynanonic (SZSE:300769) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen Dynanonic (SZSE:300769), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Dynanonic is:

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

0.02 = CN¥297m ÷ (CN¥25b - CN¥9.6b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Dynanonic has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.

View our latest analysis for Shenzhen Dynanonic

In the above chart we have measured Shenzhen Dynanonic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Dynanonic .

What Does the ROCE Trend For Shenzhen Dynanonic Tell Us?

When we looked at the ROCE trend at Shenzhen Dynanonic, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.0% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Dynanonic. These trends are starting to be recognized by investors since the stock has delivered a 0.6% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Shenzhen Dynanonic we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Shenzhen Dynanonic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.