Inner Mongolia ERDOS ResourcesLtd's (SHSE:600295) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Inner Mongolia ERDOS ResourcesLtd (SHSE:600295) 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 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. Analysts use this formula to calculate it for Inner Mongolia ERDOS ResourcesLtd:

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

0.089 = CN¥2.8b ÷ (CN¥49b - CN¥17b) (Based on the trailing twelve months to March 2024).

Therefore, Inner Mongolia ERDOS ResourcesLtd has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 6.7% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Inner Mongolia ERDOS ResourcesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia ERDOS ResourcesLtd's ROCE against it's prior returns. If you'd like to look at how Inner Mongolia ERDOS ResourcesLtd has performed in the past in other metrics, you can view this free graph of Inner Mongolia ERDOS ResourcesLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Inner Mongolia ERDOS ResourcesLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Inner Mongolia ERDOS ResourcesLtd has done well to pay down its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

In summary, we're somewhat concerned by Inner Mongolia ERDOS ResourcesLtd's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 268% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 2 warning signs for Inner Mongolia ERDOS ResourcesLtd that we think you should be aware of.

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.