Shenzhen Injoinic TechnologyLtd's (SHSE:688209) 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. 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. However, after briefly looking over the numbers, we don't think Shenzhen Injoinic TechnologyLtd (SHSE:688209) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Injoinic TechnologyLtd:

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

0.044 = CN¥85m ÷ (CN¥2.0b - CN¥109m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Injoinic TechnologyLtd has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 5.0%.

See our latest analysis for Shenzhen Injoinic 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 Shenzhen Injoinic TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Injoinic TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Injoinic TechnologyLtd's ROCE Trend?

In terms of Shenzhen Injoinic TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shenzhen Injoinic TechnologyLtd has done well to pay down its current liabilities to 5.4% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shenzhen Injoinic TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Injoinic TechnologyLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 31% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Shenzhen Injoinic TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Shenzhen Injoinic TechnologyLtd that you might be interested in.

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.