Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Ningbo Ronbay New Energy TechnologyLtd:

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

0.011 = CN¥177m ÷ (CN¥26b - CN¥10b) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Ronbay New Energy TechnologyLtd has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for Ningbo Ronbay New Energy TechnologyLtd

Above you can see how the current ROCE for Ningbo Ronbay New Energy TechnologyLtd 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 Ningbo Ronbay New Energy TechnologyLtd .

What Can We Tell From Ningbo Ronbay New Energy TechnologyLtd's ROCE Trend?

In terms of Ningbo Ronbay New Energy TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.9% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Ningbo Ronbay New Energy TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Ningbo Ronbay New Energy TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 74% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 4 warning signs we've spotted with Ningbo Ronbay New Energy TechnologyLtd (including 1 which is significant) .

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.