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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ganzhou Tengyuan Cobalt New Material (SZSE:301219), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ganzhou Tengyuan Cobalt New Material is:

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

0.096 = CN¥841m ÷ (CN¥10.0b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Thus, Ganzhou Tengyuan Cobalt New Material has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

In the above chart we have measured Ganzhou Tengyuan Cobalt New Material's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ganzhou Tengyuan Cobalt New Material .

The Trend Of ROCE

When we looked at the ROCE trend at Ganzhou Tengyuan Cobalt New Material, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Ganzhou Tengyuan Cobalt New Material has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Ganzhou Tengyuan Cobalt New Material's ROCE

While returns have fallen for Ganzhou Tengyuan Cobalt New Material in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 3.1% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to continue researching Ganzhou Tengyuan Cobalt New Material, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ganzhou Tengyuan Cobalt New Material 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.