Here's What's Concerning About Chengtun Mining Group's (SHSE:600711) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Chengtun Mining Group (SHSE:600711) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Chengtun Mining Group:

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

0.063 = CN¥1.4b ÷ (CN¥39b - CN¥16b) (Based on the trailing twelve months to March 2024).

Thus, Chengtun Mining Group has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.7%.

Check out our latest analysis for Chengtun Mining Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chengtun Mining Group's past further, check out this free graph covering Chengtun Mining Group's past earnings, revenue and cash flow.

What Can We Tell From Chengtun Mining Group's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.0% five years ago, while the business's capital employed increased by 146%. Usually this isn't ideal, but given Chengtun Mining Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Chengtun Mining Group might not have received a full period of earnings contribution from it.

On a side note, Chengtun Mining Group's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Chengtun Mining Group's ROCE

To conclude, we've found that Chengtun Mining Group is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 16% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Chengtun Mining Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Chengtun Mining Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com