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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sinosteel Luonai Materials Technology (SHSE:688119) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Sinosteel Luonai Materials Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = CN¥83m ÷ (CN¥5.7b - CN¥1.9b) (Based on the trailing twelve months to September 2023).
So, Sinosteel Luonai Materials Technology has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.1%.
View our latest analysis for Sinosteel Luonai Materials Technology
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sinosteel Luonai Materials Technology, check out these free graphs here.
The Trend Of ROCE
In terms of Sinosteel Luonai Materials Technology's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 9.6%, but since then they've fallen to 2.2%. However it looks like Sinosteel Luonai Materials Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
In summary, Sinosteel Luonai Materials Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 26% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing: We've identified 3 warning signs with Sinosteel Luonai Materials Technology (at least 2 which are a bit concerning) , and understanding these would certainly be useful.
While Sinosteel Luonai Materials Technology 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.