Here's What's Concerning About Sublime China Information's (SZSE:301299) 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Sublime China Information (SZSE:301299) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Sublime China Information, this is the formula:

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

0.06 = CN¥45m ÷ (CN¥984m - CN¥236m) (Based on the trailing twelve months to March 2024).

So, Sublime China Information has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

Check out our latest analysis for Sublime China Information

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

What Can We Tell From Sublime China Information's ROCE Trend?

In terms of Sublime China Information's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.0% from 33% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sublime China Information has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. 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...

To conclude, we've found that Sublime China Information is reinvesting in the business, but returns have been falling. Since the stock has declined 21% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Sublime China Information has the makings of a multi-bagger.

If you want to continue researching Sublime China Information, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Sublime China Information 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.

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