Investors Met With Slowing Returns on Capital At Yunnan Chihong Zinc & Germanium (SHSE:600497)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Yunnan Chihong Zinc & Germanium (SHSE:600497), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Yunnan Chihong Zinc & Germanium:

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

0.077 = CN¥1.7b ÷ (CN¥27b - CN¥5.0b) (Based on the trailing twelve months to June 2024).

Thus, Yunnan Chihong Zinc & Germanium has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 7.1%.

Check out our latest analysis for Yunnan Chihong Zinc & Germanium

Above you can see how the current ROCE for Yunnan Chihong Zinc & Germanium 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 Yunnan Chihong Zinc & Germanium for free.

What Can We Tell From Yunnan Chihong Zinc & Germanium's ROCE Trend?

There hasn't been much to report for Yunnan Chihong Zinc & Germanium's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Yunnan Chihong Zinc & Germanium to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Yunnan Chihong Zinc & Germanium has been paying out a decent 40% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 19% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Yunnan Chihong Zinc & Germanium's ROCE

In a nutshell, Yunnan Chihong Zinc & Germanium has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for Yunnan Chihong Zinc & Germanium you'll probably want to know about.

While Yunnan Chihong Zinc & Germanium 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.