The Returns On Capital At SF DiamondLtd (SZSE:300179) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating SF DiamondLtd (SZSE:300179), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for SF DiamondLtd:

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

0.044 = CN¥70m ÷ (CN¥1.9b - CN¥313m) (Based on the trailing twelve months to September 2024).

So, SF DiamondLtd has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.3%.

Check out our latest analysis for SF DiamondLtd

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 SF DiamondLtd has performed in the past in other metrics, you can view this free graph of SF DiamondLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For SF DiamondLtd Tell Us?

When we looked at the ROCE trend at SF DiamondLtd, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 4.4%. However it looks like SF DiamondLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On SF DiamondLtd's ROCE

In summary, SF DiamondLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

SF DiamondLtd 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.

While SF DiamondLtd 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.