The Returns On Capital At Ningbo Tianlong Electronics (SHSE:603266) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ningbo Tianlong Electronics (SHSE:603266) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Ningbo Tianlong Electronics is:

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

0.071 = CN¥108m ÷ (CN¥2.0b - CN¥439m) (Based on the trailing twelve months to September 2023).

So, Ningbo Tianlong Electronics has an ROCE of 7.1%. On its own, that's a low figure but it's around the 6.0% average generated by the Chemicals industry.

See our latest analysis for Ningbo Tianlong Electronics

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Tianlong Electronics.

How Are Returns Trending?

In terms of Ningbo Tianlong Electronics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 9.0% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Ningbo Tianlong Electronics' ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Tianlong Electronics' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Ningbo Tianlong Electronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Ningbo Tianlong Electronics 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.