Returns On Capital At China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 China Northern Rare Earth (Group) High-TechLtd:

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

0.07 = CN¥2.3b ÷ (CN¥42b - CN¥9.3b) (Based on the trailing twelve months to September 2024).

Thus, China Northern Rare Earth (Group) High-TechLtd has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

View our latest analysis for China Northern Rare Earth (Group) High-TechLtd

Above you can see how the current ROCE for China Northern Rare Earth (Group) High-TechLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Northern Rare Earth (Group) High-TechLtd .

What Can We Tell From China Northern Rare Earth (Group) High-TechLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at China Northern Rare Earth (Group) High-TechLtd. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 89% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On China Northern Rare Earth (Group) High-TechLtd's ROCE

As we've seen above, China Northern Rare Earth (Group) High-TechLtd's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 177% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, China Northern Rare Earth (Group) High-TechLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Northern Rare Earth (Group) High-TechLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.