Here's What To Make Of Inspur Electronic Information Industry's (SZSE:000977) Decelerating Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Having said that, from a first glance at Inspur Electronic Information Industry (SZSE:000977) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Inspur Electronic Information Industry is:

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

0.071 = CN¥1.9b ÷ (CN¥84b - CN¥57b) (Based on the trailing twelve months to September 2024).

So, Inspur Electronic Information Industry has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.7% generated by the Tech industry, it's much better.

View our latest analysis for Inspur Electronic Information Industry

In the above chart we have measured Inspur Electronic Information Industry's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Inspur Electronic Information Industry .

What Can We Tell From Inspur Electronic Information Industry's ROCE Trend?

The returns on capital haven't changed much for Inspur Electronic Information Industry in recent years. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 153% 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 68% of total assets, this reported ROCE would probably be less than7.1% because total capital employed would be higher.The 7.1% ROCE could be even lower if current liabilities weren't 68% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line On Inspur Electronic Information Industry's ROCE

As we've seen above, Inspur Electronic Information Industry's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Inspur Electronic Information Industry does have some risks though, and we've spotted 2 warning signs for Inspur Electronic Information Industry that you might be interested in.

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.