Finding companies with the potential to grow big isn’t easy, but it’s possible by looking at a few key financial indicators. In an ideal world, companies would be investing more capital into their business and the returns they get on that capital would also be increasing. When you see this, it usually means it’s a company with a good business model and lots of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends in Shenzhen Enbicool Technology (SZSE:002837), so let’s take a closer look.
What is Return on Invested Capital (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (revenue) relative to the capital employed in the business: Here’s the formula for this at Shenzhen Envicool Technology:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = CNY492m ÷ (CNY5.1b – CNY2.4b) (Based on the trailing twelve months to March 2024).
So Shenzhen Enbicool Technology has an ROCE of 18% – a standard return in itself, but much better than the 5.6% generated by the Machinery industry.
Check out our latest analysis for Shenzhen Enbicool Technology
SZSE:002837 Return on Capital June 25, 2024
In the chart above we’ve measured Shenzhen Envicool Technology’s prior ROCE against its past performance, although the future is arguably more important: If you’d like, you can see forecasts from the analysts covering Shenzhen Envicool Technology for free.
What does Shenzhen Envicool Technology’s ROCE trends indicate?
Investors will be pleased with Shenzhen Enbicool Technology’s current position. Data shows that return on capital has increased significantly by 18% over the past five years. It’s also worth noting that the company has effectively increased earnings per dollar of capital employed, and the amount of capital has also increased by 141%. This means that there is ample opportunity to invest capital internally, and at higher rates, a combination that is common in multi-baggers.
On a separate but related note, it’s important to note that Shenzhen Enbicool Technology has a current liabilities to total assets ratio of 47%, which can be considered quite high. This could pose some risk as the company is fundamentally quite reliant on suppliers and other short-term creditors to operate. Ideally, a lower ratio would mean less debt at risk.
Shenzhen Enbicool Technology’s ROCE Highlights
In summary, Shenzhen Enbicool Technology has proven that it can reinvest in its business and generate higher returns on invested capital, which is great to see, and investors have taken this pattern into consideration given the stock’s strong performance over the past five years. That said, we believe the company’s future potential is worth doing some further due diligence on.
Additionally, we’ve found 1 warning sign for Shenzhen Envicool Technology you should probably be aware of.
Shenzhen Enbicool Technology may not be currently earning the highest return on equity, but we have compiled a list of companies currently earning a return on equity greater than 25%, and you can find this free list here.
Valuation is complicated, but we can help make it simple.
Find out whether Shenzhen Enbicool Technology is potentially overvalued or undervalued by checking our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financial position and more.
View your free analysis
Have feedback about this article? Concerns about the content? Please contact us directly or email us at editorial-team (at) simplywallst.com.
This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
Valuation is complicated, but we can help make it simple.
Find out whether Shenzhen Enbicool Technology is potentially overvalued or undervalued by checking our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financial position and more.
View your free analysis
Have something to say about this article? If you have any questions about the content, please contact us directly or email us at editorial-team@simplywallst.com.
