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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Shenzhen Rapoo Technology (SZSE:002577) so let's look a bit deeper.

Understanding 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 Rapoo Technology, this is the formula:

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

0.0051 = CN¥6.0m ÷ (CN¥1.3b - CN¥115m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Rapoo Technology has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.7%.

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

How Are Returns Trending?

Shareholders will be relieved that Shenzhen Rapoo Technology has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.5% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Our Take On Shenzhen Rapoo Technology's ROCE

In summary, we're delighted to see that Shenzhen Rapoo Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 53% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Shenzhen Rapoo Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shenzhen Rapoo Technology 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.

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.