Here's What To Make Of China Nuclear Engineering's (SHSE:601611) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at China Nuclear Engineering (SHSE:601611) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. Analysts use this formula to calculate it for China Nuclear Engineering:

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

0.063 = CN¥5.2b ÷ (CN¥225b - CN¥143b) (Based on the trailing twelve months to June 2024).

Therefore, China Nuclear Engineering has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

See our latest analysis for China Nuclear Engineering

In the above chart we have measured China Nuclear Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Nuclear Engineering .

The Trend Of ROCE

The returns on capital haven't changed much for China Nuclear Engineering in recent years. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 146% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that China Nuclear Engineering has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

As we've seen above, China Nuclear Engineering's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 6.7% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

China Nuclear Engineering does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While China Nuclear Engineering 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.