What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ningbo Changhong Polymer Scientific and Technical (SHSE:605008), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ningbo Changhong Polymer Scientific and Technical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0028 = CN¥7.7m ÷ (CN¥4.4b - CN¥1.7b) (Based on the trailing twelve months to September 2023).
Thus, Ningbo Changhong Polymer Scientific and Technical has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.
Check out our latest analysis for Ningbo Changhong Polymer Scientific and Technical
Above you can see how the current ROCE for Ningbo Changhong Polymer Scientific and Technical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Changhong Polymer Scientific and Technical here for free.
What The Trend Of ROCE Can Tell Us
In terms of Ningbo Changhong Polymer Scientific and Technical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.3% from 21% 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.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Ningbo Changhong Polymer Scientific and Technical's ROCE
In summary, we're somewhat concerned by Ningbo Changhong Polymer Scientific and Technical's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 28% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Ningbo Changhong Polymer Scientific and Technical we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While Ningbo Changhong Polymer Scientific and Technical 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.
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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.
