Slowing Rates Of Return At China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) and its ROCE trend, we weren't exactly thrilled.

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. 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¥2.2b ÷ (CN¥42b - CN¥10b) (Based on the trailing twelve months to March 2024).

Therefore, China Northern Rare Earth (Group) High-TechLtd has an ROCE of 7.0%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

Check out 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, you can check out the forecasts from the analysts covering China Northern Rare Earth (Group) High-TechLtd for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at China Northern Rare Earth (Group) High-TechLtd. The company has consistently earned 7.0% for the last five years, and the capital employed within the business has risen 87% in that time. 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.

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

In conclusion, China Northern Rare Earth (Group) High-TechLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with China Northern Rare Earth (Group) High-TechLtd and understanding this should be part of your investment process.

While China Northern Rare Earth (Group) High-TechLtd 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.

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