Chengdu Screen Micro-electronicsLTD (SHSE:688053) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chengdu Screen Micro-electronicsLTD (SHSE:688053) and its ROCE trend, we weren't exactly thrilled.

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 Chengdu Screen Micro-electronicsLTD:

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

0.00057 = CN¥1.0m ÷ (CN¥1.8b - CN¥55m) (Based on the trailing twelve months to March 2024).

Therefore, Chengdu Screen Micro-electronicsLTD has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

See our latest analysis for Chengdu Screen Micro-electronicsLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Screen Micro-electronicsLTD's ROCE against it's prior returns. If you're interested in investigating Chengdu Screen Micro-electronicsLTD's past further, check out this free graph covering Chengdu Screen Micro-electronicsLTD's past earnings, revenue and cash flow.

So How Is Chengdu Screen Micro-electronicsLTD's ROCE Trending?

When we looked at the ROCE trend at Chengdu Screen Micro-electronicsLTD, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 0.06%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Chengdu Screen Micro-electronicsLTD has done well to pay down its current liabilities to 3.0% 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.

The Bottom Line On Chengdu Screen Micro-electronicsLTD's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Chengdu Screen Micro-electronicsLTD have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Chengdu Screen Micro-electronicsLTD we've found 5 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Chengdu Screen Micro-electronicsLTD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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