Tianjin Guoan Mengguli New Materials Science & Technology's (SZSE:301487) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Tianjin Guoan Mengguli New Materials Science & Technology (SZSE:301487), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tianjin Guoan Mengguli New Materials Science & Technology:

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

0.0015 = CN¥3.1m ÷ (CN¥3.7b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

So, Tianjin Guoan Mengguli New Materials Science & Technology has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Guoan Mengguli New Materials Science & Technology's ROCE against it's prior returns. If you're interested in investigating Tianjin Guoan Mengguli New Materials Science & Technology's past further, check out this free graph covering Tianjin Guoan Mengguli New Materials Science & Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Tianjin Guoan Mengguli New Materials Science & Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 2.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, Tianjin Guoan Mengguli New Materials Science & Technology has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

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. Long term shareholders who've owned the stock over the last year have experienced a 43% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Tianjin Guoan Mengguli New Materials Science & Technology (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

While Tianjin Guoan Mengguli New Materials Science & Technology 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.