Skyworth Digital (SZSE:000810) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Skyworth Digital (SZSE:000810) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Skyworth Digital, this is the formula:

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

0.071 = CN¥473m ÷ (CN¥11b - CN¥4.6b) (Based on the trailing twelve months to March 2024).

So, Skyworth Digital has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.0%.

Check out our latest analysis for Skyworth Digital

Above you can see how the current ROCE for Skyworth Digital compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Skyworth Digital .

So How Is Skyworth Digital's ROCE Trending?

When we looked at the ROCE trend at Skyworth Digital, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 9.0% five years ago. However it looks like Skyworth Digital might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Skyworth Digital has decreased its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

To conclude, we've found that Skyworth Digital is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 6.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Skyworth Digital that you might find interesting.

While Skyworth Digital 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com