Shenzhen Ysstech Info-TechLtd (SZSE:300377) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Shenzhen Ysstech Info-TechLtd (SZSE:300377), so let's see why.

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. To calculate this metric for Shenzhen Ysstech Info-TechLtd, this is the formula:

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

0.02 = CN¥59m ÷ (CN¥3.2b - CN¥226m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Ysstech Info-TechLtd has an ROCE of 2.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.3%.

Check out our latest analysis for Shenzhen Ysstech Info-TechLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen Ysstech Info-TechLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Ysstech Info-TechLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Ysstech Info-TechLtd Tell Us?

We are a bit worried about the trend of returns on capital at Shenzhen Ysstech Info-TechLtd. Unfortunately the returns on capital have diminished from the 6.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Shenzhen Ysstech Info-TechLtd to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Since the stock has skyrocketed 139% 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.

If you want to know some of the risks facing Shenzhen Ysstech Info-TechLtd we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

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.