Shenzhen Farben Information TechnologyLtd (SZSE:300925) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Shenzhen Farben Information TechnologyLtd (SZSE:300925) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shenzhen Farben Information TechnologyLtd, this is the formula:

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

0.054 = CN¥112m ÷ (CN¥2.9b - CN¥809m) (Based on the trailing twelve months to March 2024).

So, Shenzhen Farben Information TechnologyLtd has an ROCE of 5.4%. On its own that's a low return, but compared to the average of 3.9% generated by the IT industry, it's much better.

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'd like to look at how Shenzhen Farben Information TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Farben Information TechnologyLtd's past earnings, revenue and cash flow.

So How Is Shenzhen Farben Information TechnologyLtd's ROCE Trending?

On the surface, the trend of ROCE at Shenzhen Farben Information TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.4% from 26% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shenzhen Farben Information TechnologyLtd has done well to pay down its current liabilities to 28% 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.

Our Take On Shenzhen Farben Information TechnologyLtd's ROCE

While returns have fallen for Shenzhen Farben Information TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 40% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 3 warning signs for Shenzhen Farben Information TechnologyLtd that we think you should be aware of.

While Shenzhen Farben Information TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com