Shenzhen Best of Best HoldingsLtd (SZSE:001298) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can 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. Although, when we looked at Shenzhen Best of Best HoldingsLtd (SZSE:001298), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shenzhen Best of Best HoldingsLtd is:

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

0.041 = CN¥65m ÷ (CN¥2.8b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Best of Best HoldingsLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for Shenzhen Best of Best HoldingsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen Best of Best HoldingsLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Best of Best HoldingsLtd's past earnings, revenue and cash flow.

So How Is Shenzhen Best of Best HoldingsLtd's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Best of Best HoldingsLtd, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 4.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shenzhen Best of Best HoldingsLtd has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Best of Best HoldingsLtd. Furthermore the stock has climbed 9.3% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Shenzhen Best of Best HoldingsLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Shenzhen Best of Best HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.