Shenzhen Longood Intelligent ElectricLTD (SZSE:300543) Could Be Struggling To Allocate Capital

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen Longood Intelligent ElectricLTD (SZSE:300543) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Shenzhen Longood Intelligent ElectricLTD:

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

0.025 = CN¥37m ÷ (CN¥2.0b - CN¥541m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Longood Intelligent ElectricLTD has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Shenzhen Longood Intelligent ElectricLTD

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

The Trend Of ROCE

In terms of Shenzhen Longood Intelligent ElectricLTD's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.6% over the last five years. 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 Key Takeaway

We're a bit apprehensive about Shenzhen Longood Intelligent ElectricLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Shenzhen Longood Intelligent ElectricLTD does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.