Returns On Capital Signal Tricky Times Ahead For Shanghai Awinic TechnologyLtd (SHSE:688798)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Shanghai Awinic TechnologyLtd (SHSE:688798) and its ROCE trend, we weren't exactly thrilled.

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

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 Shanghai Awinic TechnologyLtd is:

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

0.061 = CN¥244m ÷ (CN¥4.9b - CN¥911m) (Based on the trailing twelve months to September 2024).

So, Shanghai Awinic TechnologyLtd has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.0%.

Check out our latest analysis for Shanghai Awinic TechnologyLtd

Above you can see how the current ROCE for Shanghai Awinic TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Awinic TechnologyLtd .

What Does the ROCE Trend For Shanghai Awinic TechnologyLtd Tell Us?

In terms of Shanghai Awinic TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.1% from 26% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shanghai Awinic TechnologyLtd has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shanghai Awinic TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Awinic TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Shanghai Awinic TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.