Capital Allocation Trends At Zhejiang Shuangyuan Technology (SHSE:688623) Aren't Ideal

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Zhejiang Shuangyuan Technology (SHSE:688623) we aren't filled with optimism, but let's investigate further.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang Shuangyuan Technology, this is the formula:

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

0.037 = CN¥78m ÷ (CN¥2.7b - CN¥528m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Shuangyuan Technology has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Zhejiang Shuangyuan Technology

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

So How Is Zhejiang Shuangyuan Technology's ROCE Trending?

In terms of Zhejiang Shuangyuan Technology's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.9% one year ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. If these trends continue, we wouldn't expect Zhejiang Shuangyuan Technology to turn into a multi-bagger.

Our Take On Zhejiang Shuangyuan Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 34% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Zhejiang Shuangyuan Technology (including 2 which are a bit unpleasant) .

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.