Anhui Shiny Electronic Technology (SZSE:300956) Is Reinvesting At Lower Rates Of Return

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Anhui Shiny Electronic Technology (SZSE:300956), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Anhui Shiny Electronic Technology, this is the formula:

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

0.015 = CN¥23m ÷ (CN¥2.6b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

So, Anhui Shiny Electronic Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.7%.

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 Can We Tell From Anhui Shiny Electronic Technology's ROCE Trend?

When we looked at the ROCE trend at Anhui Shiny Electronic Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Anhui Shiny Electronic Technology has done well to pay down its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

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. In light of this, the stock has only gained 1.7% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we found 3 warning signs for Anhui Shiny Electronic Technology (2 don't sit too well with us) 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.