Investors Could Be Concerned With Guizhou Panjiang Refined CoalLtd's (SHSE:600395) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Guizhou Panjiang Refined CoalLtd (SHSE:600395), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guizhou Panjiang Refined CoalLtd is:

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

0.053 = CN¥1.3b ÷ (CN¥34b - CN¥8.9b) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou Panjiang Refined CoalLtd has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.

See our latest analysis for Guizhou Panjiang Refined CoalLtd

In the above chart we have measured Guizhou Panjiang Refined CoalLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guizhou Panjiang Refined CoalLtd .

What Can We Tell From Guizhou Panjiang Refined CoalLtd's ROCE Trend?

In terms of Guizhou Panjiang Refined CoalLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.3% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Guizhou Panjiang Refined CoalLtd's ROCE

In summary, we're somewhat concerned by Guizhou Panjiang Refined CoalLtd's diminishing returns on increasing amounts of capital. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Guizhou Panjiang Refined CoalLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Guizhou Panjiang Refined CoalLtd 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.

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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.