Siglent TechnologiesLtd (SHSE:688112) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Siglent TechnologiesLtd (SHSE:688112) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Siglent TechnologiesLtd is:

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

0.11 = CN¥175m ÷ (CN¥1.6b - CN¥70m) (Based on the trailing twelve months to December 2023).

So, Siglent TechnologiesLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Electronic industry.

View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Siglent TechnologiesLtd .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 39% five years ago, while capital employed has grown 2,265%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Siglent TechnologiesLtd's earnings and if they change as a result from the capital raise.

On a side note, Siglent TechnologiesLtd has done well to pay down its current liabilities to 4.3% 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Siglent TechnologiesLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 49% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Siglent TechnologiesLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Siglent TechnologiesLtd 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.