Returns On Capital Signal Tricky Times Ahead For Shenzhen Sunline Tech (SZSE:300348)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen Sunline Tech (SZSE:300348) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

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 Sunline Tech is:

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).

So, 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

Above you can see how the current ROCE for Shenzhen Sunline Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shenzhen Sunline Tech's earnings and if they change as a result from the capital raise.

In Conclusion...

In summary, we're somewhat concerned by Shenzhen Sunline Tech's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 3.3% 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 about the risks facing Shenzhen Sunline Tech, we've discovered 1 warning sign that you should be aware of.

While Shenzhen Sunline Tech 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.