Capital Allocation Trends At Nantong Chaoda EquipmentLtd (SZSE:301186) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Nantong Chaoda EquipmentLtd (SZSE:301186) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Nantong Chaoda EquipmentLtd is:

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

0.055 = CN¥98m ÷ (CN¥2.1b - CN¥304m) (Based on the trailing twelve months to September 2024).

So, Nantong Chaoda EquipmentLtd has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

Check out our latest analysis for Nantong Chaoda EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nantong Chaoda EquipmentLtd's ROCE against it's prior returns. If you'd like to look at how Nantong Chaoda EquipmentLtd has performed in the past in other metrics, you can view this free graph of Nantong Chaoda EquipmentLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Nantong Chaoda EquipmentLtd Tell Us?

On the surface, the trend of ROCE at Nantong Chaoda EquipmentLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Nantong Chaoda EquipmentLtd 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.

On a side note, Nantong Chaoda EquipmentLtd has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Nantong Chaoda EquipmentLtd's ROCE

To conclude, we've found that Nantong Chaoda EquipmentLtd is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Nantong Chaoda EquipmentLtd has the makings of a multi-bagger.

Like most companies, Nantong Chaoda EquipmentLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Nantong Chaoda EquipmentLtd 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.