What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Ningbo Energy GroupLtd (SHSE:600982) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Ningbo Energy GroupLtd:

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

0.022 = CN¥196m ÷ (CN¥14b - CN¥5.1b) (Based on the trailing twelve months to June 2024).

Therefore, Ningbo Energy GroupLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.8%.

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

The Trend Of ROCE

In terms of Ningbo Energy GroupLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.2% from 3.7% five years ago. 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.

Our Take On Ningbo Energy GroupLtd's ROCE

In summary, we're somewhat concerned by Ningbo Energy GroupLtd's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 50% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Ningbo Energy GroupLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.