There Are Reasons To Feel Uneasy About Shenzhen Keanda Electronic Technology's (SZSE:002972) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Shenzhen Keanda Electronic Technology (SZSE:002972) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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)

0.042 = CN¥54m ÷ (CN¥1.4b - CN¥141m) (Based on the trailing twelve months to March 2024).

So, Shenzhen Keanda Electronic Technology has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

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

How Are Returns Trending?

On the surface, the trend of ROCE at Shenzhen Keanda Electronic Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 22% 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.

On a side note, Shenzhen Keanda Electronic Technology has done well to pay down its current liabilities to 9.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shenzhen Keanda Electronic Technology's ROCE

We're a bit apprehensive about Shenzhen Keanda Electronic Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Shenzhen Keanda Electronic Technology we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.

While Shenzhen Keanda Electronic Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.