Shenzhen Vital New Material (SZSE:301319) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shenzhen Vital New Material (SZSE:301319) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Shenzhen Vital New Material is:

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

0.074 = CN¥82m ÷ (CN¥1.2b - CN¥127m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Vital New Material has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

Check out our latest analysis for Shenzhen Vital New Material

In the above chart we have measured Shenzhen Vital New Material's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Vital New Material .

How Are Returns Trending?

In terms of Shenzhen Vital New Material's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Shenzhen Vital New Material has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Shenzhen Vital New Material's ROCE

In summary, we're somewhat concerned by Shenzhen Vital New Material's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 26% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shenzhen Vital New Material does have some risks though, and we've spotted 1 warning sign for Shenzhen Vital New Material that you might be interested in.

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.