CNGR Advanced MaterialLtd's (SZSE:300919) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at CNGR Advanced MaterialLtd (SZSE:300919) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CNGR Advanced MaterialLtd is:

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

0.053 = CN¥2.7b ÷ (CN¥71b - CN¥21b) (Based on the trailing twelve months to September 2024).

So, CNGR Advanced MaterialLtd has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.7%.

Check out our latest analysis for CNGR Advanced MaterialLtd

In the above chart we have measured CNGR Advanced MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CNGR Advanced MaterialLtd for free.

What Does the ROCE Trend For CNGR Advanced MaterialLtd Tell Us?

On the surface, the trend of ROCE at CNGR Advanced MaterialLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, CNGR Advanced MaterialLtd has done well to pay down its current liabilities to 29% 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.

What We Can Learn From CNGR Advanced MaterialLtd's ROCE

While returns have fallen for CNGR Advanced MaterialLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 67% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

CNGR Advanced MaterialLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those 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.