Shenzhen MinDe Electronics Technology (SZSE:300656) 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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 MinDe Electronics Technology (SZSE:300656) 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)

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 Shenzhen MinDe Electronics Technology:

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

0.026 = CN¥36m ÷ (CN¥1.7b - CN¥337m) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen MinDe Electronics Technology has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for Shenzhen MinDe Electronics Technology

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

How Are Returns Trending?

On the surface, the trend of ROCE at Shenzhen MinDe Electronics Technology doesn't inspire confidence. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 2.6%. 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 Shenzhen MinDe Electronics Technology's ROCE

In summary, we're somewhat concerned by Shenzhen MinDe Electronics Technology's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 96% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Shenzhen MinDe Electronics Technology does have some risks though, and we've spotted 2 warning signs for Shenzhen MinDe Electronics Technology that you might be interested in.

While Shenzhen MinDe Electronics 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.