Be Wary Of Shenzhen Farben Information TechnologyLtd (SZSE:300925) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Shenzhen Farben Information TechnologyLtd (SZSE:300925), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Shenzhen Farben Information TechnologyLtd:

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

0.044 = CN¥89m ÷ (CN¥2.7b - CN¥666m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Farben Information TechnologyLtd has an ROCE of 4.4%. Even though it's in line with the industry average of 4.4%, it's still a low return by itself.

See our latest analysis for Shenzhen Farben Information TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Farben Information TechnologyLtd'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 Farben Information TechnologyLtd.

What Does the ROCE Trend For Shenzhen Farben Information TechnologyLtd Tell Us?

When we looked at the ROCE trend at Shenzhen Farben Information TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 4.4%. However it looks like Shenzhen Farben Information TechnologyLtd 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shenzhen Farben Information TechnologyLtd has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Shenzhen Farben Information TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Farben Information TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Shenzhen Farben Information TechnologyLtd that we think you should be aware of.

While Shenzhen Farben Information TechnologyLtd 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.