Yangzhou Seashine New MaterialsLtd (SZSE:300885) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Yangzhou Seashine New MaterialsLtd (SZSE:300885), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Yangzhou Seashine New MaterialsLtd:

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

0.058 = CN¥48m ÷ (CN¥899m - CN¥65m) (Based on the trailing twelve months to June 2024).

Thus, Yangzhou Seashine New MaterialsLtd has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.8%.

Check out our latest analysis for Yangzhou Seashine New MaterialsLtd

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 Yangzhou Seashine New MaterialsLtd's past further, check out this free graph covering Yangzhou Seashine New MaterialsLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Yangzhou Seashine New MaterialsLtd Tell Us?

On the surface, the trend of ROCE at Yangzhou Seashine New MaterialsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Yangzhou Seashine New MaterialsLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 17% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 3 warning signs for Yangzhou Seashine New MaterialsLtd (1 is significant) you should be aware of.

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.