Why You Should Be Concerned About Shijihengtong Technology’s (SZSE:301428) Capital Returns: Key Insights for Investors

When searching for a potential multi-bagger stock, it’s useful to look at key trends. One important indicator is the return on capital employed (ROCE). A company with increasing ROCE and a growing capital base is likely reinvesting profits wisely. However, our review of Shijihengtong Technology (SZSE:301428) didn’t show much promise in this regard.

What Is ROCE?

ROCE measures a company’s pre-tax profit relative to the capital it uses. Here’s how it’s calculated for Shijihengtong Technology:

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

0.057 = CN¥81m ÷ (CN¥2.1b – CN¥684m) (Based on the 12 months ending September 2024).

This means Shijihengtong Technology has an ROCE of 5.7%. While this is on the low side, it matches the industry average of 5.7%.

Historical performance can offer insights, and that’s why we display the above chart. If you’re curious about Shijihengtong Technology’s past performance across other metrics, we provide a free graph showing its earnings, revenue, and cash flow.

ROCE Trends

Shijihengtong Technology’s ROCE trend isn’t encouraging. It has dropped from 19% over the past five years. Nevertheless, increased capital and revenue suggest the company is focusing on growth, even if that means lower short-term returns. If these investments succeed, the long-term outlook could be bright.

Interestingly, the company has also reduced its current liabilities to 33% of total assets, which may explain the ROCE decline. Less reliance on short-term creditors can lower certain risks, creating a more stable financial environment. However, some may argue this affects operational efficiency since the company is funding more with its own resources.

Key Takeaway

Though Shijihengtong Technology’s returns have dipped, the fact that both revenue and capital employed have risen is promising. Despite a modest 5.2% stock gain over the last year, it might still be an appealing investment if other fundamentals hold up.

However, it’s crucial to note that we’ve identified 2 warning signs (one is quite significant!) that potential investors should consider.

For those keen on finding strong companies with solid earnings, there’s a free list available of firms with impressive balance sheets and returns on equity.