Longshine Technology Group (SZSE:300682) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Longshine Technology Group (SZSE:300682) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Longshine Technology Group is:

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

0.04 = CN¥329m ÷ (CN¥10b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

So, Longshine Technology Group has an ROCE of 4.0%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.3%.

See our latest analysis for Longshine Technology Group

In the above chart we have measured Longshine Technology Group'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 Longshine Technology Group .

What Can We Tell From Longshine Technology Group's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 7.4% five years ago, while capital employed has grown 97%. Usually this isn't ideal, but given Longshine Technology Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Longshine Technology Group might not have received a full period of earnings contribution from it.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Longshine Technology Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.0% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Longshine Technology Group does come with some risks, and we've found 2 warning signs that you should be aware of.

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.