Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005), it didn't seem to tick all of these boxes.

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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. To calculate this metric for Ningbo Ronbay New Energy TechnologyLtd, this is the formula:

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

0.009 = CN¥140m ÷ (CN¥26b - CN¥10b) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Ronbay New Energy TechnologyLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.1%.

Check out our latest analysis for Ningbo Ronbay New Energy TechnologyLtd

In the above chart we have measured Ningbo Ronbay New Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ningbo Ronbay New Energy TechnologyLtd for free.

So How Is Ningbo Ronbay New Energy TechnologyLtd's ROCE Trending?

On the surface, the trend of ROCE at Ningbo Ronbay New Energy TechnologyLtd doesn't inspire confidence. 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. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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

We're a bit apprehensive about Ningbo Ronbay New Energy TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 12% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Ningbo Ronbay New Energy TechnologyLtd, we've spotted 3 warning signs, and 1 of them is significant.

While Ningbo Ronbay New Energy TechnologyLtd 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.