We Like These Underlying Return On Capital Trends At Shenzhen Rapoo Technology (SZSE:002577)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Shenzhen Rapoo Technology (SZSE:002577) and its trend of ROCE, we really liked what we saw.

What Is 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 Rapoo Technology:

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

0.0051 = CN¥6.0m ÷ (CN¥1.3b - CN¥115m) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Rapoo Technology has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.7%.

View our latest analysis for Shenzhen Rapoo Technology

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 Rapoo Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Rapoo Technology's past earnings, revenue and cash flow.

So How Is Shenzhen Rapoo Technology's ROCE Trending?

Shareholders will be relieved that Shenzhen Rapoo Technology has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.5% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

As discussed above, Shenzhen Rapoo Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 55% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Shenzhen Rapoo Technology can keep these trends up, it could have a bright future ahead.

Shenzhen Rapoo Technology does have some risks though, and we've spotted 2 warning signs for Shenzhen Rapoo Technology that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.