The Returns On Capital At China National Software & Service (SHSE:600536) Don't Inspire Confidence

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China National Software & Service (SHSE:600536), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on China National Software & Service is:

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

0.01 = CN¥35m ÷ (CN¥8.9b - CN¥5.5b) (Based on the trailing twelve months to September 2024).

Therefore, China National Software & Service has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Software industry average of 2.5%.

See our latest analysis for China National Software & Service

Above you can see how the current ROCE for China National Software & Service 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 China National Software & Service .

How Are Returns Trending?

We weren't thrilled with the trend because China National Software & Service's ROCE has reduced by 74% over the last five years, while the business employed 20% more capital. Usually this isn't ideal, but given China National Software & Service conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. China National Software & Service probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 62%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On China National Software & Service's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for China National Software & Service have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

China National Software & Service could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600536 on our platform quite valuable.

While China National Software & Service 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.