If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen JT Automation EquipmentLtd (SZSE:300400), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shenzhen JT Automation EquipmentLtd, this is the formula:

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

0.028 = CN¥25m ÷ (CN¥1.2b - CN¥345m) (Based on the trailing twelve months to June 2024).

So, Shenzhen JT Automation EquipmentLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

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

So How Is Shenzhen JT Automation EquipmentLtd's ROCE Trending?

In terms of Shenzhen JT Automation EquipmentLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.0% over the last five years. 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.

The Bottom Line On Shenzhen JT Automation EquipmentLtd's ROCE

We're a bit apprehensive about Shenzhen JT Automation EquipmentLtd 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 4.3% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Shenzhen JT Automation EquipmentLtd (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While Shenzhen JT Automation EquipmentLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.