Some Investors May Be Worried About ChinaEtek Service & Technology's (SZSE:301208) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at ChinaEtek Service & Technology (SZSE:301208) and its ROCE trend, we weren't exactly thrilled.

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 ChinaEtek Service & Technology is:

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

0.091 = CN¥136m ÷ (CN¥1.8b - CN¥329m) (Based on the trailing twelve months to March 2024).

Thus, ChinaEtek Service & Technology has an ROCE of 9.1%. 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 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 The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ChinaEtek Service & Technology doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 9.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a related note, ChinaEtek Service & Technology has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. 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 ChinaEtek Service & Technology's ROCE

Bringing it all together, while we're somewhat encouraged by ChinaEtek Service & Technology'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 12% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with ChinaEtek Service & Technology (including 2 which make us uncomfortable) .

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.

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