Some Investors May Be Worried About Triumph Science & TechnologyLtd's (SHSE:600552) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. 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 Triumph Science & TechnologyLtd (SHSE:600552), it didn't seem to tick all of these boxes.

Understanding 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 Triumph Science & TechnologyLtd, this is the formula:

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

0.0045 = CN¥26m ÷ (CN¥10b - CN¥4.5b) (Based on the trailing twelve months to March 2024).

So, Triumph Science & TechnologyLtd has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

See our latest analysis for Triumph Science & TechnologyLtd

Above you can see how the current ROCE for Triumph Science & TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Triumph Science & TechnologyLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Triumph Science & TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 3.9%, but since then they've fallen to 0.5%. However it looks like Triumph Science & TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Triumph Science & TechnologyLtd's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Triumph Science & TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Triumph Science & TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 119% gain to shareholders who have held 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Triumph Science & TechnologyLtd (of which 1 makes us a bit uncomfortable!) that you should know about.

While Triumph Science & TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.