What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Shenzhen Jove Enterprise (SZSE:300814), 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. Analysts use this formula to calculate it for Shenzhen Jove Enterprise:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0085 = CN¥15m ÷ (CN¥2.3b - CN¥530m) (Based on the trailing twelve months to March 2024).
Thus, Shenzhen Jove Enterprise has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.
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 Shenzhen Jove Enterprise has performed in the past in other metrics, you can view this free graph of Shenzhen Jove Enterprise's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Shenzhen Jove Enterprise doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 0.9%. 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 related note, Shenzhen Jove Enterprise has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. 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.
The Bottom Line On Shenzhen Jove Enterprise's ROCE
We're a bit apprehensive about Shenzhen Jove Enterprise because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 45% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Shenzhen Jove Enterprise does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
While Shenzhen Jove Enterprise 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.