There Are Reasons To Feel Uneasy About Shenzhen TXD TechnologyLtd's (SZSE:002845) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Shenzhen TXD TechnologyLtd (SZSE:002845), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Shenzhen TXD TechnologyLtd, this is the formula:

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

0.0034 = CN¥12m ÷ (CN¥9.4b - CN¥5.9b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen TXD TechnologyLtd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Shenzhen TXD TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen TXD TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen TXD TechnologyLtd's past further, check out this free graph covering Shenzhen TXD TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen TXD TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen TXD TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 7.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shenzhen TXD TechnologyLtd has done well to pay down its current liabilities to 63% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 63% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Shenzhen TXD TechnologyLtd's ROCE

While returns have fallen for Shenzhen TXD TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 4.2% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified 2 warning signs with Shenzhen TXD TechnologyLtd (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Shenzhen TXD TechnologyLtd 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.