The Returns On Capital At FangDa Carbon New MaterialLtd (SHSE:600516) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at FangDa Carbon New MaterialLtd (SHSE:600516) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 FangDa Carbon New MaterialLtd is:

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

0.015 = CN¥301m ÷ (CN¥22b - CN¥2.2b) (Based on the trailing twelve months to December 2023).

Thus, FangDa Carbon New MaterialLtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.7%.

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'd like to see what analysts are forecasting going forward, you should check out 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. To be more specific, ROCE has fallen from 53% over the last five years. However it looks like FangDa Carbon New MaterialLtd 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by FangDa Carbon New MaterialLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last five years. Therefore based on the analysis done in this article, we don't think FangDa Carbon New MaterialLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for FangDa Carbon New MaterialLtd you'll probably want to know about.

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.