Silvery Dragon Prestressed MaterialsLTD Tianjin (SHSE:603969) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Silvery Dragon Prestressed MaterialsLTD Tianjin (SHSE:603969) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Silvery Dragon Prestressed MaterialsLTD Tianjin, this is the formula:

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

0.066 = CN¥146m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Silvery Dragon Prestressed MaterialsLTD Tianjin has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.3% average generated by the Metals and Mining industry.

View our latest analysis for Silvery Dragon Prestressed MaterialsLTD Tianjin

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

How Are Returns Trending?

In terms of Silvery Dragon Prestressed MaterialsLTD Tianjin's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.3% over the last five years. However it looks like Silvery Dragon Prestressed MaterialsLTD Tianjin might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

What We Can Learn From Silvery Dragon Prestressed MaterialsLTD Tianjin's ROCE

Bringing it all together, while we're somewhat encouraged by Silvery Dragon Prestressed MaterialsLTD Tianjin's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Silvery Dragon Prestressed MaterialsLTD Tianjin we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Silvery Dragon Prestressed MaterialsLTD Tianjin 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.