Here's What's Concerning About Shenzhen Neoway TechnologyLtd's (SHSE:688159) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shenzhen Neoway TechnologyLtd (SHSE:688159) 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 Shenzhen Neoway TechnologyLtd is:

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

0.045 = CN¥38m ÷ (CN¥1.7b - CN¥875m) (Based on the trailing twelve months to March 2024).

So, Shenzhen Neoway TechnologyLtd has an ROCE of 4.5%. On its own, that's a low figure but it's around the 3.9% average generated by the Communications industry.

Check out our latest analysis for Shenzhen Neoway TechnologyLtd

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

How Are Returns Trending?

When we looked at the ROCE trend at Shenzhen Neoway TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Neoway TechnologyLtd is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Shenzhen Neoway TechnologyLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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