Some Investors May Be Worried About New East New Materials' (SHSE:603110) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within New East New Materials (SHSE:603110), we weren't too hopeful.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for New East New Materials:

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

0.013 = CN¥8.9m ÷ (CN¥820m - CN¥126m) (Based on the trailing twelve months to March 2024).

Therefore, New East New Materials has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for New East New Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for New East New Materials' ROCE against it's prior returns. If you're interested in investigating New East New Materials' past further, check out this free graph covering New East New Materials' past earnings, revenue and cash flow.

What Does the ROCE Trend For New East New Materials Tell Us?

In terms of New East New Materials' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 5.2% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on New East New Materials becoming one if things continue as they have.

What We Can Learn From New East New Materials' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for New East New Materials (2 shouldn't be ignored) you should be aware of.

While New East New Materials 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.

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