HangZhou Nbond Nonwovens (SHSE:603238) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at HangZhou Nbond Nonwovens (SHSE:603238) 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. The formula for this calculation on HangZhou Nbond Nonwovens is:

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

0.045 = CN¥73m ÷ (CN¥2.4b - CN¥750m) (Based on the trailing twelve months to September 2023).

Therefore, HangZhou Nbond Nonwovens has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.9%.

Check out our latest analysis for HangZhou Nbond Nonwovens

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 HangZhou Nbond Nonwovens.

What Can We Tell From HangZhou Nbond Nonwovens' ROCE Trend?

In terms of HangZhou Nbond Nonwovens' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.5% from 6.8% five years ago. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for HangZhou Nbond Nonwovens. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for HangZhou Nbond Nonwovens (of which 1 shouldn't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.