Returns On Capital Signal Difficult Times Ahead For FangDa Carbon New MaterialLtd (SHSE:600516)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within FangDa Carbon New MaterialLtd (SHSE:600516), we weren't too hopeful.

What Is 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. The formula for this calculation on FangDa Carbon New MaterialLtd is:

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

0.012 = CN¥219m ÷ (CN¥21b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

So, FangDa Carbon New MaterialLtd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for FangDa Carbon New MaterialLtd

Above you can see how the current ROCE for FangDa Carbon New MaterialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for FangDa Carbon New MaterialLtd .

So How Is FangDa Carbon New MaterialLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at FangDa Carbon New MaterialLtd. To be more specific, the ROCE was 21% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect FangDa Carbon New MaterialLtd to turn into a multi-bagger.

The Bottom Line On FangDa Carbon New MaterialLtd's ROCE

In summary, it's unfortunate that FangDa Carbon New MaterialLtd is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching FangDa Carbon New MaterialLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.

While FangDa Carbon New MaterialLtd 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.