Investors Could Be Concerned With Avary Holding(Shenzhen)Co's (SZSE:002938) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Avary Holding(Shenzhen)Co (SZSE:002938), it didn't seem to tick all of these boxes.

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 Avary Holding(Shenzhen)Co:

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

0.096 = CN¥3.0b ÷ (CN¥40b - CN¥9.2b) (Based on the trailing twelve months to March 2024).

Therefore, Avary Holding(Shenzhen)Co has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

See our latest analysis for Avary Holding(Shenzhen)Co

Above you can see how the current ROCE for Avary Holding(Shenzhen)Co compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Avary Holding(Shenzhen)Co .

How Are Returns Trending?

When we looked at the ROCE trend at Avary Holding(Shenzhen)Co, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.6% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Avary Holding(Shenzhen)Co have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 42% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Avary Holding(Shenzhen)Co does come with some risks, and we've found 1 warning sign that you should be aware of.

While Avary Holding(Shenzhen)Co 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.

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