We Like These Underlying Return On Capital Trends At Shenzhen Sea Star TechnologyLtd (SZSE:002137)

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shenzhen Sea Star TechnologyLtd (SZSE:002137) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Sea Star TechnologyLtd is:

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

0.012 = CN¥19m ÷ (CN¥1.9b - CN¥285m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Sea Star TechnologyLtd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Software industry average of 2.3%.

View our latest analysis for Shenzhen Sea Star TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Sea Star TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen Sea Star TechnologyLtd's past further, check out this free graph covering Shenzhen Sea Star TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Sea Star TechnologyLtd's ROCE Trend?

Shenzhen Sea Star TechnologyLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.2% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line On Shenzhen Sea Star TechnologyLtd's ROCE

To sum it up, Shenzhen Sea Star TechnologyLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 2 warning signs facing Shenzhen Sea Star TechnologyLtd that you might find interesting.

While Shenzhen Sea Star TechnologyLtd 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.