Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shijihengtong Technology (SZSE:301428) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shijihengtong Technology:

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

0.059 = CN¥80m ÷ (CN¥2.0b - CN¥613m) (Based on the trailing twelve months to June 2024).

So, Shijihengtong Technology has an ROCE of 5.9%. On its own that's a low return, but compared to the average of 2.9% generated by the Interactive Media and Services industry, it's much better.

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 Shijihengtong Technology has performed in the past in other metrics, you can view this free graph of Shijihengtong Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Shijihengtong Technology doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 5.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shijihengtong Technology has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Shijihengtong Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shijihengtong Technology is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 3 warning signs for Shijihengtong Technology that we think you should be aware of.

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.