Qinhuangdao Tianqin Equipment ManufacturingLtd (SZSE:300922) Is Reinvesting At Lower Rates Of Return

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Qinhuangdao Tianqin Equipment ManufacturingLtd (SZSE:300922) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Qinhuangdao Tianqin Equipment ManufacturingLtd is:

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

0.044 = CN¥39m ÷ (CN¥960m - CN¥68m) (Based on the trailing twelve months to September 2024).

So, Qinhuangdao Tianqin Equipment ManufacturingLtd has an ROCE of 4.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

See our latest analysis for Qinhuangdao Tianqin Equipment ManufacturingLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Qinhuangdao Tianqin Equipment ManufacturingLtd.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 155%. That being said, Qinhuangdao Tianqin Equipment ManufacturingLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Qinhuangdao Tianqin Equipment ManufacturingLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Qinhuangdao Tianqin Equipment ManufacturingLtd. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with Qinhuangdao Tianqin Equipment ManufacturingLtd (including 1 which is a bit unpleasant) .

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.