Shenzhen Edadoc TechnologyLtd (SZSE:301366) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shenzhen Edadoc TechnologyLtd (SZSE:301366), it didn't seem to tick all of these boxes.

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

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

0.039 = CN¥87m ÷ (CN¥2.5b - CN¥262m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Edadoc TechnologyLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

View our latest analysis for Shenzhen Edadoc TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Edadoc TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen Edadoc TechnologyLtd's past further, check out this free graph covering Shenzhen Edadoc TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Shenzhen Edadoc TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shenzhen Edadoc TechnologyLtd has done well to pay down its current liabilities to 11% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shenzhen Edadoc TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Edadoc TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Edadoc TechnologyLtd (including 1 which doesn't sit too well with us) .

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.