Returns On Capital Signal Tricky Times Ahead For Inner Mongolia ERDOS ResourcesLtd (SHSE:600295)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Inner Mongolia ERDOS ResourcesLtd (SHSE:600295), 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. The formula for this calculation on Inner Mongolia ERDOS ResourcesLtd is:

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).

Thus, Inner Mongolia ERDOS ResourcesLtd has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.9%.

See 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.

What Does the ROCE Trend For Inner Mongolia ERDOS ResourcesLtd Tell Us?

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 Bottom Line On Inner Mongolia ERDOS ResourcesLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Inner Mongolia ERDOS ResourcesLtd have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 169%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Inner Mongolia ERDOS ResourcesLtd does have some risks though, and we've spotted 2 warning signs for Inner Mongolia ERDOS ResourcesLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.