Shenzhen Jieshun Science and Technology IndustryLtd (SZSE:002609) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shenzhen Jieshun Science and Technology IndustryLtd (SZSE:002609) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for Shenzhen Jieshun Science and Technology IndustryLtd:

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

0.02 = CN¥56m ÷ (CN¥3.6b - CN¥853m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Jieshun Science and Technology IndustryLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.6%.

Check out our latest analysis for Shenzhen Jieshun Science and Technology IndustryLtd

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're interested in investigating Shenzhen Jieshun Science and Technology IndustryLtd's past further, check out this free graph covering Shenzhen Jieshun Science and Technology IndustryLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Jieshun Science and Technology IndustryLtd Tell Us?

In terms of Shenzhen Jieshun Science and Technology IndustryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.0% from 4.5% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Shenzhen Jieshun Science and Technology IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Jieshun Science and Technology IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. Therefore based on the analysis done in this article, we don't think Shenzhen Jieshun Science and Technology IndustryLtd has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Jieshun Science and Technology IndustryLtd (including 1 which is a bit unpleasant) .

While Shenzhen Jieshun Science and Technology IndustryLtd 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.