To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Ningxia Qinglong Pipes Industry Group (SZSE:002457) 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. To calculate this metric for Ningxia Qinglong Pipes Industry Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CN¥107m ÷ (CN¥4.1b - CN¥1.6b) (Based on the trailing twelve months to September 2023).
Therefore, Ningxia Qinglong Pipes Industry Group has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.8%.
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're interested in investigating Ningxia Qinglong Pipes Industry Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Ningxia Qinglong Pipes Industry Group Tell Us?
When we looked at the ROCE trend at Ningxia Qinglong Pipes Industry Group, we didn't gain much confidence. Around five years ago the returns on capital were 5.6%, but since then they've fallen to 4.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Ningxia Qinglong Pipes Industry Group have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Ningxia Qinglong Pipes Industry Group does have some risks though, and we've spotted 1 warning sign for Ningxia Qinglong Pipes Industry Group that you might be interested in.
While Ningxia Qinglong Pipes Industry Group 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.
