Here's What's Concerning About Guangdong Feinan Resources Recycling's (SZSE:301500) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Guangdong Feinan Resources Recycling (SZSE:301500) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Guangdong Feinan Resources Recycling, this is the formula:

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

0.058 = CN¥385m ÷ (CN¥12b - CN¥5.2b) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Feinan Resources Recycling has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

View our latest analysis for Guangdong Feinan Resources Recycling

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're interested in investigating Guangdong Feinan Resources Recycling's past further, check out this free graph covering Guangdong Feinan Resources Recycling's past earnings, revenue and cash flow.

So How Is Guangdong Feinan Resources Recycling's ROCE Trending?

When we looked at the ROCE trend at Guangdong Feinan Resources Recycling, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 5.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 44%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Guangdong Feinan Resources Recycling's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Feinan Resources Recycling is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 35% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with Guangdong Feinan Resources Recycling (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.