Here's What's Concerning About Shenzhen Chuangyitong TechnologyLtd's (SZSE:300991) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shenzhen Chuangyitong TechnologyLtd (SZSE:300991) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Shenzhen Chuangyitong TechnologyLtd:

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

0.044 = CN¥35m ÷ (CN¥1.3b - CN¥537m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Chuangyitong TechnologyLtd has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.4% average generated by the Electronic industry.

See our latest analysis for Shenzhen Chuangyitong TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shenzhen Chuangyitong TechnologyLtd's past further, check out this free graph covering Shenzhen Chuangyitong TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Chuangyitong TechnologyLtd Tell Us?

In terms of Shenzhen Chuangyitong TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 25% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shenzhen Chuangyitong TechnologyLtd's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shenzhen Chuangyitong TechnologyLtd'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 Shenzhen Chuangyitong TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenzhen Chuangyitong TechnologyLtd (of which 2 shouldn't be ignored!) that you should know about.

While Shenzhen Chuangyitong TechnologyLtd 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.