Some Investors May Be Worried About Guizhou Panjiang Refined CoalLtd's (SHSE:600395) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Guizhou Panjiang Refined CoalLtd (SHSE:600395) 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guizhou Panjiang Refined CoalLtd, this is the formula:

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

0.0042 = CN¥121m ÷ (CN¥42b - CN¥13b) (Based on the trailing twelve months to September 2024).

Therefore, Guizhou Panjiang Refined CoalLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 10.0%.

View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guizhou Panjiang Refined CoalLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Guizhou Panjiang Refined CoalLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 15% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line

In summary, we're somewhat concerned by Guizhou Panjiang Refined CoalLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 9.6% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Guizhou Panjiang Refined CoalLtd you'll probably want to 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.