Returns On Capital At Sichuan Tianyi Comheart Telecom (SZSE:300504) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sichuan Tianyi Comheart Telecom (SZSE:300504) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Sichuan Tianyi Comheart Telecom:

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

0.018 = CN¥40m ÷ (CN¥2.9b - CN¥621m) (Based on the trailing twelve months to June 2024).

Thus, Sichuan Tianyi Comheart Telecom has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.4%.

View our latest analysis for Sichuan Tianyi Comheart Telecom

In the above chart we have measured Sichuan Tianyi Comheart Telecom'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 Sichuan Tianyi Comheart Telecom for free.

What The Trend Of ROCE Can Tell Us

In terms of Sichuan Tianyi Comheart Telecom's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.0% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Sichuan Tianyi Comheart Telecom's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sichuan Tianyi Comheart Telecom have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Sichuan Tianyi Comheart Telecom (1 can't be ignored) you should be aware of.

While Sichuan Tianyi Comheart Telecom 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.