There Are Reasons To Feel Uneasy About Ningbo TIP Rubber TechnologyLtd's (SHSE:605255) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Ningbo TIP Rubber TechnologyLtd (SHSE:605255) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ningbo TIP Rubber TechnologyLtd:

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

0.036 = CN¥31m ÷ (CN¥882m - CN¥42m) (Based on the trailing twelve months to September 2024).

Thus, Ningbo TIP Rubber TechnologyLtd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

Check out our latest analysis for Ningbo TIP Rubber TechnologyLtd

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

How Are Returns Trending?

On the surface, the trend of ROCE at Ningbo TIP Rubber TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Ningbo TIP Rubber TechnologyLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Ningbo TIP Rubber TechnologyLtd is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last three years has been flat. Therefore based on the analysis done in this article, we don't think Ningbo TIP Rubber TechnologyLtd has the makings of a multi-bagger.

If you'd like to know more about Ningbo TIP Rubber TechnologyLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

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.