Qingdao Copton Technology (SHSE:603798) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Qingdao Copton Technology (SHSE:603798), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Qingdao Copton Technology:

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

0.031 = CN¥37m ÷ (CN¥1.3b - CN¥124m) (Based on the trailing twelve months to September 2023).

Thus, Qingdao Copton Technology has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Qingdao Copton Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Copton Technology's ROCE against it's prior returns. If you'd like to look at how Qingdao Copton Technology has performed in the past in other metrics, you can view this free graph of Qingdao Copton Technology's past earnings, revenue and cash flow.

What Can We Tell From Qingdao Copton Technology's ROCE Trend?

When we looked at the ROCE trend at Qingdao Copton Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 11% 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.

The Bottom Line

While returns have fallen for Qingdao Copton Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 7.2% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 2 warning signs for Qingdao Copton Technology you'll probably want to know about.

While Qingdao Copton Technology 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.