Returns On Capital At Cangzhou Mingzhu PlasticLtd (SZSE:002108) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Cangzhou Mingzhu PlasticLtd (SZSE:002108), it didn't seem to tick all of these boxes.

What Is 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 Cangzhou Mingzhu PlasticLtd, this is the formula:

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

0.0081 = CN¥50m ÷ (CN¥7.4b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Therefore, Cangzhou Mingzhu PlasticLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 5.2%.

Check out our latest analysis for Cangzhou Mingzhu PlasticLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cangzhou Mingzhu PlasticLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Cangzhou Mingzhu PlasticLtd.

The Trend Of ROCE

When we looked at the ROCE trend at Cangzhou Mingzhu PlasticLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.0% 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.

What We Can Learn From Cangzhou Mingzhu PlasticLtd's ROCE

To conclude, we've found that Cangzhou Mingzhu PlasticLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Cangzhou Mingzhu PlasticLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.