Shenzhen SEICHI Technologies' (SHSE:688627) Returns On Capital Are Heading Higher

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Shenzhen SEICHI Technologies' (SHSE:688627) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Shenzhen SEICHI Technologies:

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

0.042 = CN¥73m ÷ (CN¥1.9b - CN¥232m) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen SEICHI Technologies has an ROCE of 4.2%. On its own, that's a low figure but it's around the 5.2% average generated by the Electronic industry.

See our latest analysis for Shenzhen SEICHI Technologies

In the above chart we have measured Shenzhen SEICHI Technologies' 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 Shenzhen SEICHI Technologies .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Shenzhen SEICHI Technologies is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 4.2% which is a sight for sore eyes. In addition to that, Shenzhen SEICHI Technologies is employing 1,719% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Shenzhen SEICHI Technologies' ROCE

To the delight of most shareholders, Shenzhen SEICHI Technologies has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 50% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Shenzhen SEICHI Technologies does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Shenzhen SEICHI Technologies 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.