Lingda Group (SZSE:300125) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Lingda Group's (SZSE:300125) returns on capital, so let's have a look.

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

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. The formula for this calculation on Lingda Group is:

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

0.06 = CN¥91m ÷ (CN¥2.1b - CN¥598m) (Based on the trailing twelve months to September 2023).

So, Lingda Group has an ROCE of 6.0%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Check out our latest analysis for Lingda Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lingda Group's ROCE against it's prior returns. If you'd like to look at how Lingda Group has performed in the past in other metrics, you can view this free graph of Lingda Group's past earnings, revenue and cash flow.

So How Is Lingda Group's ROCE Trending?

The fact that Lingda Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.0% which is a sight for sore eyes. In addition to that, Lingda Group is employing 27% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Lingda Group's ROCE

In summary, it's great to see that Lingda Group has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 28% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Lingda Group, we've discovered 2 warning signs that you should be aware of.

While Lingda 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.