Capital Allocation Trends At ShenzhenJingQuanHua ElectronicsLtd (SZSE:002885) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential 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. Having said that, from a first glance at ShenzhenJingQuanHua ElectronicsLtd (SZSE:002885) 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)?

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 ShenzhenJingQuanHua ElectronicsLtd:

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

0.0019 = CN¥3.0m ÷ (CN¥3.2b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, ShenzhenJingQuanHua ElectronicsLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

View our latest analysis for ShenzhenJingQuanHua ElectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for ShenzhenJingQuanHua ElectronicsLtd's ROCE against it's prior returns. If you'd like to look at how ShenzhenJingQuanHua ElectronicsLtd has performed in the past in other metrics, you can view this free graph of ShenzhenJingQuanHua ElectronicsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ShenzhenJingQuanHua ElectronicsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 6.3% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 50%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From ShenzhenJingQuanHua ElectronicsLtd's ROCE

To conclude, we've found that ShenzhenJingQuanHua ElectronicsLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 2 warning signs for ShenzhenJingQuanHua ElectronicsLtd you'll probably want to know about.

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.