Ningbo Jintian Copper (Group)'s (SHSE:601609) Returns On Capital Not Reflecting Well On The Business

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 Ningbo Jintian Copper (Group) (SHSE:601609), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Ningbo Jintian Copper (Group), this is the formula:

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

0.071 = CN¥1.2b ÷ (CN¥27b - CN¥10b) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Jintian Copper (Group) has an ROCE of 7.1%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

Check out our latest analysis for Ningbo Jintian Copper (Group)

In the above chart we have measured Ningbo Jintian Copper (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo Jintian Copper (Group) .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ningbo Jintian Copper (Group) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Ningbo Jintian Copper (Group) has decreased its current liabilities to 38% 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.

What We Can Learn From Ningbo Jintian Copper (Group)'s ROCE

While returns have fallen for Ningbo Jintian Copper (Group) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Ningbo Jintian Copper (Group) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Ningbo Jintian Copper (Group) 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.