The Returns On Capital At Nanjing Canatal Data-Centre Environmental Tech (SHSE:603912) 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Nanjing Canatal Data-Centre Environmental Tech (SHSE:603912) 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 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. Analysts use this formula to calculate it for Nanjing Canatal Data-Centre Environmental Tech:

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

0.002 = CN¥4.4m ÷ (CN¥3.4b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, Nanjing Canatal Data-Centre Environmental Tech has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

View our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Canatal Data-Centre Environmental Tech's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nanjing Canatal Data-Centre Environmental Tech.

So How Is Nanjing Canatal Data-Centre Environmental Tech's ROCE Trending?

When we looked at the ROCE trend at Nanjing Canatal Data-Centre Environmental Tech, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Nanjing Canatal Data-Centre Environmental Tech is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 27% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Nanjing Canatal Data-Centre Environmental Tech does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.