Be Wary Of Shenzhen Forms Syntron InformationLtd (SZSE:300468) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shenzhen Forms Syntron InformationLtd (SZSE:300468) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shenzhen Forms Syntron InformationLtd, this is the formula:

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

0.0074 = CN¥12m ÷ (CN¥1.7b - CN¥110m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Forms Syntron InformationLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.

See our latest analysis for Shenzhen Forms Syntron InformationLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Forms Syntron InformationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Forms Syntron InformationLtd.

What Does the ROCE Trend For Shenzhen Forms Syntron InformationLtd Tell Us?

On the surface, the trend of ROCE at Shenzhen Forms Syntron InformationLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. However it looks like Shenzhen Forms Syntron InformationLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Shenzhen Forms Syntron InformationLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Forms Syntron InformationLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Shenzhen Forms Syntron InformationLtd (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

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.