If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Tianjin Guoan Mengguli New Materials Science & Technology (SZSE:301487) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Tianjin Guoan Mengguli New Materials Science & Technology is:

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

0.0015 = CN¥3.1m ÷ (CN¥3.7b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, Tianjin Guoan Mengguli New Materials Science & Technology has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Guoan Mengguli New Materials Science & Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tianjin Guoan Mengguli New Materials Science & Technology.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Tianjin Guoan Mengguli New Materials Science & Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, Tianjin Guoan Mengguli New Materials Science & Technology has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Tianjin Guoan Mengguli New Materials Science & Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Tianjin Guoan Mengguli New Materials Science & Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last year have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Tianjin Guoan Mengguli New Materials Science & Technology we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.