Investors Could Be Concerned With Shenzhen Sunline Tech's (SZSE:300348) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Shenzhen Sunline Tech (SZSE:300348) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenzhen Sunline Tech:

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

0.023 = CN¥48m ÷ (CN¥3.0b - CN¥920m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Sunline Tech has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the IT industry average of 3.7%.

Check out our latest analysis for Shenzhen Sunline Tech

In the above chart we have measured Shenzhen Sunline Tech's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Sunline Tech .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Shenzhen Sunline Tech's ROCE has reduced by 46% over the last five years, while the business employed 34% more capital. That being said, Shenzhen Sunline Tech raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Sunline Tech 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.

Our Take On Shenzhen Sunline Tech's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Sunline Tech have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 29% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Shenzhen Sunline Tech, we've spotted 2 warning signs, and 1 of them is a bit concerning.

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.