Tibet Summit ResourcesLtd (SHSE:600338) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Tibet Summit ResourcesLtd (SHSE:600338), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on Tibet Summit ResourcesLtd is:

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

0.024 = CN¥90m ÷ (CN¥5.9b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Thus, Tibet Summit ResourcesLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Tibet Summit ResourcesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tibet Summit ResourcesLtd'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 Tibet Summit ResourcesLtd.

So How Is Tibet Summit ResourcesLtd's ROCE Trending?

There is reason to be cautious about Tibet Summit ResourcesLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 26% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tibet Summit ResourcesLtd to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Tibet Summit ResourcesLtd is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 21% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 1 warning sign for Tibet Summit ResourcesLtd you'll probably want to know about.

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.