Investors Met With Slowing Returns on Capital At Ningbo Ligong Environment And Energy TechnologyLtd (SZSE:002322)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Ligong Environment And Energy TechnologyLtd (SZSE:002322), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Ningbo Ligong Environment And Energy TechnologyLtd:

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

0.099 = CN¥287m ÷ (CN¥3.2b - CN¥276m) (Based on the trailing twelve months to September 2024).

So, Ningbo Ligong Environment And Energy TechnologyLtd has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 5.7% generated by the Electrical industry, it's much better.

See our latest analysis for Ningbo Ligong Environment And Energy TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ningbo Ligong Environment And Energy TechnologyLtd has performed in the past in other metrics, you can view this free graph of Ningbo Ligong Environment And Energy TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Over the past five years, Ningbo Ligong Environment And Energy TechnologyLtd's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Ningbo Ligong Environment And Energy TechnologyLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Ningbo Ligong Environment And Energy TechnologyLtd has done well to reduce current liabilities to 8.7% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In a nutshell, Ningbo Ligong Environment And Energy TechnologyLtd has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Ningbo Ligong Environment And Energy TechnologyLtd, we've spotted 2 warning signs, and 1 of them is concerning.

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.