Here's What's Concerning About Tianjin Guoan Mengguli New Materials Science & Technology's (SZSE:301487) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Tianjin Guoan Mengguli New Materials Science & Technology (SZSE:301487) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tianjin Guoan Mengguli New Materials Science & Technology is:

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

0.012 = CN¥26m ÷ (CN¥3.6b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

So, Tianjin Guoan Mengguli New Materials Science & Technology has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Tianjin Guoan Mengguli New Materials Science & Technology

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 Tianjin Guoan Mengguli New Materials Science & Technology.

What Can We Tell From Tianjin Guoan Mengguli New Materials Science & Technology's ROCE Trend?

On the surface, the trend of ROCE at Tianjin Guoan Mengguli New Materials Science & Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.2% from 5.6% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Tianjin Guoan Mengguli New Materials Science & Technology has done well to pay down its current liabilities to 39% 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Tianjin Guoan Mengguli New Materials Science & Technology have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 66% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Tianjin Guoan Mengguli New Materials Science & Technology does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

While Tianjin Guoan Mengguli New Materials Science & Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.