Smartgiant Technology (SHSE:688115) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think Smartgiant Technology (SHSE:688115) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Smartgiant Technology:

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

0.0066 = CN¥8.4m ÷ (CN¥1.3b - CN¥58m) (Based on the trailing twelve months to September 2024).

So, Smartgiant Technology has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

View our latest analysis for Smartgiant Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Smartgiant Technology's ROCE against it's prior returns. If you'd like to look at how Smartgiant Technology has performed in the past in other metrics, you can view this free graph of Smartgiant Technology's past earnings, revenue and cash flow.

What Can We Tell From Smartgiant Technology's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 32% five years ago, while capital employed has grown 1,034%. That being said, Smartgiant Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Smartgiant Technology might not have received a full period of earnings contribution from it.

On a related note, Smartgiant Technology has decreased its current liabilities to 4.4% of total assets. So we could link some of this to the decrease in ROCE. 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...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Smartgiant Technology. And the stock has followed suit returning a meaningful 33% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Smartgiant Technology does have some risks though, and we've spotted 3 warning signs for Smartgiant Technology that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.