TRS Information Technology (SZSE:300229) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating TRS Information Technology (SZSE:300229), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 TRS Information Technology is:

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

0.011 = CN¥36m ÷ (CN¥3.8b - CN¥371m) (Based on the trailing twelve months to September 2023).

Therefore, TRS Information Technology has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.7%.

View our latest analysis for TRS Information Technology

In the above chart we have measured TRS Information Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for TRS Information Technology .

So How Is TRS Information Technology's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.8% five years ago, while capital employed has grown 78%. That being said, TRS Information Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. TRS Information Technology 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.

On a side note, TRS Information Technology has done well to pay down its current liabilities to 9.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From TRS Information Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for TRS Information Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 117% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for TRS Information Technology (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.