Returns On Capital At Shenzhen Phoenix Telecom TechnologyLtd (SZSE:301191) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shenzhen Phoenix Telecom TechnologyLtd (SZSE:301191) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Shenzhen Phoenix Telecom TechnologyLtd, this is the formula:

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

0.081 = CN¥141m ÷ (CN¥2.3b - CN¥561m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Phoenix Telecom TechnologyLtd has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 5.2% generated by the Communications industry, it's much better.

See our latest analysis for Shenzhen Phoenix Telecom TechnologyLtd

Above you can see how the current ROCE for Shenzhen Phoenix Telecom TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Phoenix Telecom TechnologyLtd for free.

What Does the ROCE Trend For Shenzhen Phoenix Telecom TechnologyLtd Tell Us?

The returns on capital haven't changed much for Shenzhen Phoenix Telecom TechnologyLtd in recent years. The company has consistently earned 8.1% for the last five years, and the capital employed within the business has risen 859% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shenzhen Phoenix Telecom TechnologyLtd has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Shenzhen Phoenix Telecom TechnologyLtd's ROCE

Long story short, while Shenzhen Phoenix Telecom TechnologyLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 14% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Shenzhen Phoenix Telecom TechnologyLtd, we've discovered 2 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.