Returns On Capital At Yunnan Nantian Electronics InformationLtd (SZSE:000948) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at Yunnan Nantian Electronics InformationLtd (SZSE:000948) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Yunnan Nantian Electronics InformationLtd is:

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

0.031 = CN¥99m ÷ (CN¥8.7b - CN¥5.5b) (Based on the trailing twelve months to September 2024).

Therefore, Yunnan Nantian Electronics InformationLtd has an ROCE of 3.1%. On its own, that's a low figure but it's around the 3.7% average generated by the IT industry.

View our latest analysis for Yunnan Nantian Electronics InformationLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yunnan Nantian Electronics InformationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yunnan Nantian Electronics InformationLtd.

So How Is Yunnan Nantian Electronics InformationLtd's ROCE Trending?

When we looked at the ROCE trend at Yunnan Nantian Electronics InformationLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.1% over the last five years. However it looks like Yunnan Nantian Electronics InformationLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Yunnan Nantian Electronics InformationLtd's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.1%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Yunnan Nantian Electronics InformationLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Yunnan Nantian Electronics InformationLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Yunnan Nantian Electronics InformationLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Yunnan Nantian Electronics InformationLtd 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.