Infore Environment Technology Group (SZSE:000967) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Infore Environment Technology Group (SZSE:000967), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Infore Environment Technology Group, this is the formula:

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

0.037 = CN¥810m ÷ (CN¥29b - CN¥7.0b) (Based on the trailing twelve months to June 2024).

So, Infore Environment Technology Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

See our latest analysis for Infore Environment Technology Group

Above you can see how the current ROCE for Infore Environment Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Infore Environment Technology Group for free.

What The Trend Of ROCE Can Tell Us

In terms of Infore Environment Technology Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Infore Environment Technology Group has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Infore Environment Technology Group's ROCE

Bringing it all together, while we're somewhat encouraged by Infore Environment Technology Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Infore Environment Technology Group has the makings of a multi-bagger.

Like most companies, Infore Environment Technology Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Infore Environment Technology Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.