Returns On Capital Signal Tricky Times Ahead For Shenzhen Keanda Electronic Technology (SZSE:002972)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shenzhen Keanda Electronic Technology (SZSE:002972), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Keanda Electronic Technology, this is the formula:

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

0.055 = CN¥67m ÷ (CN¥1.4b - CN¥221m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Keanda Electronic Technology has an ROCE of 5.5%. On its own, that's a low figure but it's around the 5.2% average generated by the Electronic industry.

View our latest analysis for Shenzhen Keanda Electronic Technology

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shenzhen Keanda Electronic Technology doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 5.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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...

In summary, we're somewhat concerned by Shenzhen Keanda Electronic Technology's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Shenzhen Keanda Electronic Technology (including 1 which can't be ignored) .

While Shenzhen Keanda Electronic Technology 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.