Xiamen Sinic-Tek Intelligent Technology's (SZSE:301568) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Xiamen Sinic-Tek Intelligent Technology (SZSE:301568), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Xiamen Sinic-Tek Intelligent Technology is:

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

0.062 = CN¥61m ÷ (CN¥1.1b - CN¥123m) (Based on the trailing twelve months to September 2024).

Thus, Xiamen Sinic-Tek Intelligent Technology has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

Check out our latest analysis for Xiamen Sinic-Tek Intelligent Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Xiamen Sinic-Tek Intelligent Technology has performed in the past in other metrics, you can view this free graph of Xiamen Sinic-Tek Intelligent Technology's past earnings, revenue and cash flow.

So How Is Xiamen Sinic-Tek Intelligent Technology's ROCE Trending?

When we looked at the ROCE trend at Xiamen Sinic-Tek Intelligent Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.2% from 47% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Xiamen Sinic-Tek Intelligent Technology has decreased 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Xiamen Sinic-Tek Intelligent Technology have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Xiamen Sinic-Tek Intelligent Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.