Some Investors May Be Worried About SHENZHEN TOPRAYSOLARLtd's (SZSE:002218) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think SHENZHEN TOPRAYSOLARLtd (SZSE:002218) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SHENZHEN TOPRAYSOLARLtd:

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

0.0099 = CN¥61m ÷ (CN¥6.9b - CN¥739m) (Based on the trailing twelve months to September 2024).

So, SHENZHEN TOPRAYSOLARLtd has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.1%.

See our latest analysis for SHENZHEN TOPRAYSOLARLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for SHENZHEN TOPRAYSOLARLtd's ROCE against it's prior returns. If you'd like to look at how SHENZHEN TOPRAYSOLARLtd has performed in the past in other metrics, you can view this free graph of SHENZHEN TOPRAYSOLARLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of SHENZHEN TOPRAYSOLARLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 1.0%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, SHENZHEN TOPRAYSOLARLtd has decreased its current liabilities to 11% 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 SHENZHEN TOPRAYSOLARLtd's ROCE

While returns have fallen for SHENZHEN TOPRAYSOLARLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 17% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

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

While SHENZHEN TOPRAYSOLARLtd 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.