The Returns On Capital At Qingdao Daneng Environmental Protection Equipment (SHSE:688501) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at Qingdao Daneng Environmental Protection Equipment (SHSE:688501), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Qingdao Daneng Environmental Protection Equipment is:

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

0.12 = CN¥109m ÷ (CN¥2.2b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

So, Qingdao Daneng Environmental Protection Equipment has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Machinery industry.

Check out our latest analysis for Qingdao Daneng Environmental Protection Equipment

Above you can see how the current ROCE for Qingdao Daneng Environmental Protection Equipment 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 Qingdao Daneng Environmental Protection Equipment .

So How Is Qingdao Daneng Environmental Protection Equipment's ROCE Trending?

When we looked at the ROCE trend at Qingdao Daneng Environmental Protection Equipment, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Qingdao Daneng Environmental Protection Equipment has a current liabilities to total assets ratio of 58%, 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Qingdao Daneng Environmental Protection Equipment. These growth trends haven't led to growth returns though, since the stock has fallen 15% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Qingdao Daneng Environmental Protection Equipment does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.