Returns On Capital Signal Tricky Times Ahead For Triumph Science & TechnologyLtd (SHSE:600552)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Triumph Science & TechnologyLtd (SHSE:600552), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Triumph Science & TechnologyLtd:

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

0.0068 = CN¥44m ÷ (CN¥11b - CN¥4.8b) (Based on the trailing twelve months to September 2024).

Therefore, Triumph Science & TechnologyLtd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for Triumph Science & TechnologyLtd

In the above chart we have measured Triumph Science & 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 Triumph Science & TechnologyLtd for free.

The Trend Of ROCE

When we looked at the ROCE trend at Triumph Science & TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.7% from 4.5% five years ago. 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 side note, Triumph Science & TechnologyLtd has done well to pay down its current liabilities to 43% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Triumph Science & TechnologyLtd's ROCE

To conclude, we've found that Triumph Science & TechnologyLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 98% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Triumph Science & TechnologyLtd (including 1 which can't be ignored) .

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.