Shenzhen Forms Syntron InformationLtd (SZSE:300468) Could Be Struggling To Allocate Capital

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shenzhen Forms Syntron InformationLtd (SZSE:300468) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Shenzhen Forms Syntron InformationLtd is:

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're interested in investigating Shenzhen Forms Syntron InformationLtd's past further, check out this free graph covering Shenzhen Forms Syntron InformationLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shenzhen Forms Syntron InformationLtd, we didn't gain much confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 0.7%. 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. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Shenzhen Forms Syntron InformationLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.