Nanjing OLO Home FurnishingLtd (SHSE:603326) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nanjing OLO Home FurnishingLtd (SHSE:603326) 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 Nanjing OLO Home FurnishingLtd, this is the formula:

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

0.075 = CN¥112m ÷ (CN¥2.2b - CN¥732m) (Based on the trailing twelve months to June 2024).

So, Nanjing OLO Home FurnishingLtd has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 8.8%.

Check out our latest analysis for Nanjing OLO Home FurnishingLtd

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 Nanjing OLO Home FurnishingLtd.

What Does the ROCE Trend For Nanjing OLO Home FurnishingLtd Tell Us?

In terms of Nanjing OLO Home FurnishingLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Nanjing OLO Home FurnishingLtd 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 19% in the last five years. Therefore based on the analysis done in this article, we don't think Nanjing OLO Home FurnishingLtd has the makings of a multi-bagger.

Nanjing OLO Home FurnishingLtd does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.

While Nanjing OLO Home FurnishingLtd 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.