Some Investors May Be Worried About Shenzhen Xinyichang Technology's (SHSE:688383) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Xinyichang Technology (SHSE:688383), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shenzhen Xinyichang Technology is:

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

0.022 = CN¥33m ÷ (CN¥2.7b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Xinyichang Technology has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.

See our latest analysis for Shenzhen Xinyichang Technology

In the above chart we have measured Shenzhen Xinyichang Technology'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 Xinyichang Technology .

What The Trend Of ROCE Can Tell Us

In terms of Shenzhen Xinyichang Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.2% from 31% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, Shenzhen Xinyichang Technology has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Shenzhen Xinyichang Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Xinyichang Technology have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 61% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenzhen Xinyichang Technology (of which 1 is a bit unpleasant!) that you should know about.

While Shenzhen Xinyichang Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com