Sublime China Information (SZSE:301299) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Sublime China Information (SZSE:301299) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. 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)

0.04 = CN¥28m ÷ (CN¥955m - CN¥247m) (Based on the trailing twelve months to September 2023).

So, Sublime China Information has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 6.2%.

View 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.

How Are Returns Trending?

In terms of Sublime China Information's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 34%, but since then they've fallen to 4.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Sublime China Information has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Sublime China Information's ROCE

In summary, Sublime China Information is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last year. Therefore based on the analysis done in this article, we don't think Sublime China Information has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Sublime China Information (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Sublime China Information 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.

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.