Sichuan Tianyi Comheart Telecom (SZSE:300504) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Sichuan Tianyi Comheart Telecom (SZSE:300504), it didn't seem to tick all of these boxes.

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 Sichuan Tianyi Comheart Telecom is:

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

0.03 = CN¥68m ÷ (CN¥2.9b - CN¥619m) (Based on the trailing twelve months to March 2024).

So, Sichuan Tianyi Comheart Telecom has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 3.9%.

Check out our latest analysis for Sichuan Tianyi Comheart Telecom

Above you can see how the current ROCE for Sichuan Tianyi Comheart Telecom compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sichuan Tianyi Comheart Telecom .

So How Is Sichuan Tianyi Comheart Telecom's ROCE Trending?

On the surface, the trend of ROCE at Sichuan Tianyi Comheart Telecom doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 8.1% five years ago. 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.

The Bottom Line

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 54% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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