Here's What's Concerning About Siglent TechnologiesLtd's (SHSE:688112) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Siglent TechnologiesLtd (SHSE:688112) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Siglent TechnologiesLtd:

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

0.064 = CN¥97m ÷ (CN¥1.6b - CN¥86m) (Based on the trailing twelve months to June 2024).

Therefore, Siglent TechnologiesLtd has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.4%.

See our latest analysis for Siglent TechnologiesLtd

In the above chart we have measured Siglent TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Siglent TechnologiesLtd .

What Can We Tell From Siglent TechnologiesLtd's ROCE Trend?

When we looked at the ROCE trend at Siglent TechnologiesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 6.4%. However it looks like Siglent TechnologiesLtd 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'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 related note, Siglent TechnologiesLtd has decreased its current liabilities to 5.4% 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.

What We Can Learn From Siglent TechnologiesLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Siglent TechnologiesLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 49% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

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

While Siglent TechnologiesLtd 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.