Returns On Capital At Ningbo Jintian Copper (Group) (SHSE:601609) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 briefly looking over the numbers, we don't think Ningbo Jintian Copper (Group) (SHSE:601609) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.05 = CN¥718m ÷ (CN¥24b - CN¥9.7b) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Jintian Copper (Group) has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.6%.

View 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, you can check out the forecasts from the analysts covering Ningbo Jintian Copper (Group) for free.

How Are Returns Trending?

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 5.0% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ningbo Jintian Copper (Group) has done well to pay down its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

To conclude, we've found that Ningbo Jintian Copper (Group) is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Ningbo Jintian Copper (Group) does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

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.