ChinaEtek Service & Technology (SZSE:301208) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 ChinaEtek Service & Technology (SZSE:301208), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for ChinaEtek Service & Technology:

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

0.078 = CN¥117m ÷ (CN¥1.9b - CN¥371m) (Based on the trailing twelve months to September 2024).

Therefore, ChinaEtek Service & Technology has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.7%.

See our latest analysis for ChinaEtek Service & Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for ChinaEtek Service & Technology's ROCE against it's prior returns. If you'd like to look at how ChinaEtek Service & Technology has performed in the past in other metrics, you can view this free graph of ChinaEtek Service & Technology's past earnings, revenue and cash flow.

What Can We Tell From ChinaEtek Service & Technology's ROCE Trend?

On the surface, the trend of ROCE at ChinaEtek Service & Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, ChinaEtek Service & Technology has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 ChinaEtek Service & Technology's ROCE

In summary, we're somewhat concerned by ChinaEtek Service & Technology's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 17% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

ChinaEtek Service & Technology does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

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.