What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Rayitek Hi-Tech Film Company Shenzhen (SHSE:688323), it didn't seem to tick all of these boxes.
Understanding 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. The formula for this calculation on Rayitek Hi-Tech Film Company Shenzhen is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0096 = CN¥20m ÷ (CN¥2.3b - CN¥206m) (Based on the trailing twelve months to March 2023).
Therefore, Rayitek Hi-Tech Film Company Shenzhen has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.1%.
View our latest analysis for Rayitek Hi-Tech Film Company Shenzhen
In the above chart we have measured Rayitek Hi-Tech Film Company Shenzhen's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rayitek Hi-Tech Film Company Shenzhen.
What Does the ROCE Trend For Rayitek Hi-Tech Film Company Shenzhen Tell Us?
When we looked at the ROCE trend at Rayitek Hi-Tech Film Company Shenzhen, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.1% over the last five years. 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 side note, Rayitek Hi-Tech Film Company Shenzhen has done well to pay down its current liabilities to 9.0% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Rayitek Hi-Tech Film Company Shenzhen's ROCE
We're a bit apprehensive about Rayitek Hi-Tech Film Company Shenzhen because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 3.2% over the last year, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Rayitek Hi-Tech Film Company Shenzhen does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.
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.