Returns On Capital Signal Tricky Times Ahead For Shenghe Resources Holding (SHSE:600392)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shenghe Resources Holding (SHSE:600392) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shenghe Resources Holding is:

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

0.03 = CN¥284m ÷ (CN¥14b - CN¥4.4b) (Based on the trailing twelve months to June 2024).

Therefore, Shenghe Resources Holding has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

View our latest analysis for Shenghe Resources Holding

Above you can see how the current ROCE for Shenghe Resources Holding 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 Shenghe Resources Holding .

What Can We Tell From Shenghe Resources Holding's ROCE Trend?

On the surface, the trend of ROCE at Shenghe Resources Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 8.2% five years ago. 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.

Our Take On Shenghe Resources Holding's ROCE

In summary, we're somewhat concerned by Shenghe Resources Holding's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Shenghe Resources Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shenghe Resources Holding 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.