Shengyi TechnologyLtd (SHSE:600183) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. 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.

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 Shengyi TechnologyLtd is:

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

0.082 = CN¥1.4b ÷ (CN¥25b - CN¥7.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shengyi TechnologyLtd has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

View our latest analysis for Shengyi TechnologyLtd

In the above chart we have measured Shengyi TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shengyi TechnologyLtd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shengyi TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shengyi TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shengyi TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Shengyi TechnologyLtd that we think you should be aware of.

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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.