Slowing Rates Of Return At Shenzhen Easttop Supply Chain Management (SZSE:002889) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Shenzhen Easttop Supply Chain Management (SZSE:002889) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Easttop Supply Chain Management:

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

0.078 = CN¥178m ÷ (CN¥4.7b - CN¥2.4b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Easttop Supply Chain Management has an ROCE of 7.8%. On its own, that's a low figure but it's around the 7.1% average generated by the Logistics industry.

View our latest analysis for Shenzhen Easttop Supply Chain Management

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 Shenzhen Easttop Supply Chain Management has performed in the past in other metrics, you can view this free graph of Shenzhen Easttop Supply Chain Management's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Shenzhen Easttop Supply Chain Management's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.8% and the business has deployed 60% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shenzhen Easttop Supply Chain Management has done well to reduce current liabilities to 51% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 51%, some of that risk is still prevalent.

Our Take On Shenzhen Easttop Supply Chain Management's ROCE

As we've seen above, Shenzhen Easttop Supply Chain Management's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Easttop Supply Chain Management (of which 1 is a bit unpleasant!) that you should know about.

While Shenzhen Easttop Supply Chain Management isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com