Be Wary Of Shengyi TechnologyLtd (SHSE:600183) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Shengyi TechnologyLtd (SHSE:600183) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shengyi TechnologyLtd, this is the formula:

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

0.10 = CN¥1.7b ÷ (CN¥26b - CN¥8.9b) (Based on the trailing twelve months to June 2024).

Therefore, Shengyi TechnologyLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.4% it's much better.

View our latest analysis for Shengyi TechnologyLtd

Above you can see how the current ROCE for Shengyi TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shengyi TechnologyLtd .

What Can We Tell From Shengyi TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Shengyi TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shengyi TechnologyLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Shengyi TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Shengyi TechnologyLtd that you might be interested in.

While Shengyi 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.