There Are Reasons To Feel Uneasy About Shenzhen Phoenix Telecom TechnologyLtd's (SZSE:301191) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shenzhen Phoenix Telecom TechnologyLtd (SZSE:301191), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shenzhen Phoenix Telecom TechnologyLtd is:

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

0.055 = CN¥98m ÷ (CN¥2.3b - CN¥515m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Phoenix Telecom TechnologyLtd has an ROCE of 5.5%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.4%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Shenzhen Phoenix Telecom TechnologyLtd .

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

In terms of Shenzhen Phoenix Telecom TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Shenzhen Phoenix Telecom TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shenzhen Phoenix Telecom TechnologyLtd has decreased its current liabilities to 23% 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.

Our Take On Shenzhen Phoenix Telecom TechnologyLtd's ROCE

In summary, Shenzhen Phoenix Telecom TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Shenzhen Phoenix Telecom TechnologyLtd and understanding them should be part of your investment process.

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.