Capital Allocation Trends At Tianjin Ruixin TechnologyLtd (SZSE:300828) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Tianjin Ruixin TechnologyLtd (SZSE:300828), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tianjin Ruixin TechnologyLtd, this is the formula:

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

0.073 = CN¥57m ÷ (CN¥862m - CN¥75m) (Based on the trailing twelve months to September 2024).

Thus, Tianjin Ruixin TechnologyLtd has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

Check out our latest analysis for Tianjin Ruixin TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tianjin Ruixin TechnologyLtd has performed in the past in other metrics, you can view this free graph of Tianjin Ruixin TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Tianjin Ruixin TechnologyLtd Tell Us?

In terms of Tianjin Ruixin TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.3% from 16% five years ago. 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.

The Bottom Line On Tianjin Ruixin TechnologyLtd's ROCE

In summary, we're somewhat concerned by Tianjin Ruixin TechnologyLtd's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 30% 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 Tianjin Ruixin TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

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.