Anhui Shiny Electronic Technology (SZSE:300956) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Anhui Shiny Electronic Technology (SZSE:300956) 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. The formula for this calculation on Anhui Shiny Electronic Technology is:

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

0.021 = CN¥32m ÷ (CN¥2.8b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Thus, Anhui Shiny Electronic Technology has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Tech industry average of 6.1%.

Check out our latest analysis for Anhui Shiny Electronic Technology

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

What Does the ROCE Trend For Anhui Shiny Electronic Technology Tell Us?

In terms of Anhui Shiny Electronic Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Anhui Shiny Electronic Technology has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Anhui Shiny Electronic Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Anhui Shiny Electronic Technology. Furthermore the stock has climbed 64% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Anhui Shiny Electronic Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.