Some Investors May Be Worried About Longyan Zhuoyue New Energy's (SHSE:688196) Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Longyan Zhuoyue New Energy (SHSE:688196), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Longyan Zhuoyue New Energy:

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

0.029 = CN¥90m ÷ (CN¥3.2b - CN¥100m) (Based on the trailing twelve months to December 2023).

Therefore, Longyan Zhuoyue New Energy has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

See our latest analysis for Longyan Zhuoyue New Energy

Above you can see how the current ROCE for Longyan Zhuoyue New Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Longyan Zhuoyue New Energy for free.

What Does the ROCE Trend For Longyan Zhuoyue New Energy Tell Us?

On the surface, the trend of ROCE at Longyan Zhuoyue New Energy doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 2.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Longyan Zhuoyue New Energy has done well to pay down its current liabilities to 3.1% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Longyan Zhuoyue New Energy's ROCE

In summary, we're somewhat concerned by Longyan Zhuoyue New Energy's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 52% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Longyan Zhuoyue New Energy that we think you should be aware of.

While Longyan Zhuoyue New Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.