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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shenzhen iN-Cube Automation (SZSE:301312) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen iN-Cube Automation, this is the formula:

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

0.0037 = CN¥4.3m ÷ (CN¥1.3b - CN¥147m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen iN-Cube Automation has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

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're interested in investigating Shenzhen iN-Cube Automation's past further, check out this free graph covering Shenzhen iN-Cube Automation's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen iN-Cube Automation Tell Us?

On the surface, the trend of ROCE at Shenzhen iN-Cube Automation doesn't inspire confidence. To be more specific, ROCE has fallen from 41% 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen iN-Cube Automation have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 43% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Shenzhen iN-Cube Automation (of which 1 makes us a bit uncomfortable!) that you should know about.

While Shenzhen iN-Cube Automation 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.