Some Investors May Be Worried About FangDa Carbon New MaterialLtd's (SHSE:600516) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think FangDa Carbon New MaterialLtd (SHSE:600516) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for FangDa Carbon New MaterialLtd, this is the formula:

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

0.022 = CN¥436m ÷ (CN¥22b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

Thus, FangDa Carbon New MaterialLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Check out 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 .

The Trend Of ROCE

When we looked at the ROCE trend at FangDa Carbon New MaterialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 2.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 FangDa Carbon New MaterialLtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 3 warning signs for FangDa Carbon New MaterialLtd that we think you should be aware of.

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.