Nanchang Mineral Systems' (SZSE:001360) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Nanchang Mineral Systems (SZSE:001360), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nanchang Mineral Systems:

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

0.064 = CN¥92m ÷ (CN¥2.0b - CN¥572m) (Based on the trailing twelve months to March 2024).

Therefore, Nanchang Mineral Systems has an ROCE of 6.4%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for Nanchang Mineral Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanchang Mineral Systems' ROCE against it's prior returns. If you're interested in investigating Nanchang Mineral Systems' past further, check out this free graph covering Nanchang Mineral Systems' past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Nanchang Mineral Systems doesn't inspire confidence. Over the last four years, returns on capital have decreased to 6.4% from 21% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Nanchang Mineral Systems has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Nanchang Mineral Systems' ROCE

To conclude, we've found that Nanchang Mineral Systems is reinvesting in the business, but returns have been falling. Since the stock has declined 33% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Nanchang Mineral Systems does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) 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.

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