Slowing Rates Of Return At Skyworth Digital (SZSE:000810) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Skyworth Digital (SZSE:000810) and its ROCE trend, we weren't exactly thrilled.

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

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)

0.072 = CN¥472m ÷ (CN¥11b - CN¥4.9b) (Based on the trailing twelve months to December 2023).

So, Skyworth Digital has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 4.3% generated by the Communications industry, it's much better.

View our latest analysis for Skyworth Digital

In the above chart we have measured Skyworth Digital's 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 Skyworth Digital .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Skyworth Digital. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 86% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 43% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 43%, some of that risk is still prevalent.

What We Can Learn From Skyworth Digital's ROCE

In conclusion, Skyworth Digital has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Skyworth Digital, we've discovered 1 warning sign that you should be aware of.

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.