The Returns On Capital At Qingdao Paguld Intelligent ManufacturingLtd (SZSE:301456) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Qingdao Paguld Intelligent ManufacturingLtd (SZSE:301456) 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 Qingdao Paguld Intelligent ManufacturingLtd is:

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

0.032 = CN¥68m ÷ (CN¥2.3b - CN¥156m) (Based on the trailing twelve months to September 2024).

Therefore, Qingdao Paguld Intelligent ManufacturingLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for Qingdao Paguld Intelligent ManufacturingLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Paguld Intelligent ManufacturingLtd's ROCE against it's prior returns. If you're interested in investigating Qingdao Paguld Intelligent ManufacturingLtd's past further, check out this free graph covering Qingdao Paguld Intelligent ManufacturingLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Qingdao Paguld Intelligent ManufacturingLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 3.2%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Qingdao Paguld Intelligent ManufacturingLtd has done well to pay down its current liabilities to 6.8% 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.

The Bottom Line On Qingdao Paguld Intelligent ManufacturingLtd's ROCE

While returns have fallen for Qingdao Paguld Intelligent ManufacturingLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 14% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Qingdao Paguld Intelligent ManufacturingLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.