Shenzhen Microgate Technology's (SZSE:300319) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shenzhen Microgate Technology (SZSE:300319) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shenzhen Microgate Technology is:

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

0.057 = CN¥265m ÷ (CN¥6.2b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Microgate Technology has an ROCE of 5.7%. On its own, that's a low figure but it's around the 5.4% average generated by the Electronic industry.

View our latest analysis for Shenzhen Microgate Technology

In the above chart we have measured Shenzhen Microgate Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Microgate Technology for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Shenzhen Microgate Technology. The company has employed 103% more capital in the last five years, and the returns on that capital have remained stable at 5.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Shenzhen Microgate Technology's ROCE

Long story short, while Shenzhen Microgate Technology has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Microgate Technology (of which 1 is concerning!) that you should know about.

While Shenzhen Microgate 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.

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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.