Techshine ElectronicsLtd (SZSE:301379) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Techshine ElectronicsLtd (SZSE:301379) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Techshine ElectronicsLtd, this is the formula:

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

0.071 = CN¥92m ÷ (CN¥1.8b - CN¥447m) (Based on the trailing twelve months to September 2023).

Therefore, Techshine ElectronicsLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

See our latest analysis for Techshine ElectronicsLtd

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

What Does the ROCE Trend For Techshine ElectronicsLtd Tell Us?

On the surface, the trend of ROCE at Techshine ElectronicsLtd doesn't inspire confidence. Around four years ago the returns on capital were 14%, but since then they've fallen to 7.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Techshine ElectronicsLtd has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Techshine ElectronicsLtd's ROCE

To conclude, we've found that Techshine ElectronicsLtd is reinvesting in the business, but returns have been falling. 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.

If you want to know some of the risks facing Techshine ElectronicsLtd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.