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Be Wary Of Shenzhen Sosen ElectronicsLtd (SZSE:301002) And Its Returns On Capital

Simply Wall St ·  Jan 23 17:49

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen Sosen ElectronicsLtd (SZSE:301002) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Sosen ElectronicsLtd:

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

0.013 = CN¥14m ÷ (CN¥1.5b - CN¥340m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Sosen ElectronicsLtd has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

Check out our latest analysis for Shenzhen Sosen ElectronicsLtd

roce
SZSE:301002 Return on Capital Employed January 23rd 2024

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shenzhen Sosen ElectronicsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.3% from 53% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Shenzhen Sosen ElectronicsLtd has done well to pay down its current liabilities to 23% 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.

Our Take On Shenzhen Sosen ElectronicsLtd's ROCE

We're a bit apprehensive about Shenzhen Sosen ElectronicsLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Shenzhen Sosen ElectronicsLtd (including 1 which can't be ignored) .

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.

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

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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