Shengyi Electronics' (SHSE:688183) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Shengyi Electronics (SHSE:688183) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shengyi Electronics is:

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

0.029 = CN¥123m ÷ (CN¥7.0b - CN¥2.7b) (Based on the trailing twelve months to September 2024).

So, Shengyi Electronics has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for Shengyi Electronics

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shengyi Electronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Shengyi Electronics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shengyi Electronics is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Shengyi Electronics, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

While Shengyi Electronics 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.