What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Chongqing Shunbo AluminumLtd (SZSE:002996) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Chongqing Shunbo AluminumLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥223m ÷ (CN¥8.7b - CN¥4.2b) (Based on the trailing twelve months to March 2024).
So, Chongqing Shunbo AluminumLtd has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Chongqing Shunbo AluminumLtd's ROCE against it's prior returns. If you'd like to look at how Chongqing Shunbo AluminumLtd has performed in the past in other metrics, you can view this free graph of Chongqing Shunbo AluminumLtd's past earnings, revenue and cash flow.
What Can We Tell From Chongqing Shunbo AluminumLtd's ROCE Trend?
We weren't thrilled with the trend because Chongqing Shunbo AluminumLtd's ROCE has reduced by 69% over the last five years, while the business employed 237% more capital. That being said, Chongqing Shunbo AluminumLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Chongqing Shunbo AluminumLtd might not have received a full period of earnings contribution from it.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 49%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Key Takeaway
While returns have fallen for Chongqing Shunbo AluminumLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 60% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing: We've identified 5 warning signs with Chongqing Shunbo AluminumLtd (at least 3 which can't be ignored) , and understanding these would certainly be useful.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com