Returns On Capital At Liaoning Cheng Da (SHSE:600739) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Liaoning Cheng Da (SHSE:600739), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Liaoning Cheng Da, this is the formula:

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

0.0024 = CN¥90m ÷ (CN¥48b - CN¥10b) (Based on the trailing twelve months to June 2024).

Therefore, Liaoning Cheng Da has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.7%.

Check out our latest analysis for Liaoning Cheng Da

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Liaoning Cheng Da has performed in the past in other metrics, you can view this free graph of Liaoning Cheng Da's past earnings, revenue and cash flow.

So How Is Liaoning Cheng Da's ROCE Trending?

When we looked at the ROCE trend at Liaoning Cheng Da, we didn't gain much confidence. Around five years ago the returns on capital were 2.5%, but since then they've fallen to 0.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 Bottom Line

Bringing it all together, while we're somewhat encouraged by Liaoning Cheng Da's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Liaoning Cheng Da does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those 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.