Ningbo Changhong Polymer Scientific and Technical (SHSE:605008) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Changhong Polymer Scientific and Technical (SHSE:605008) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Ningbo Changhong Polymer Scientific and Technical, this is the formula:

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

0.013 = CN¥36m ÷ (CN¥5.0b - CN¥2.2b) (Based on the trailing twelve months to June 2024).

Thus, Ningbo Changhong Polymer Scientific and Technical has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Ningbo Changhong Polymer Scientific and Technical

Above you can see how the current ROCE for Ningbo Changhong Polymer Scientific and Technical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Changhong Polymer Scientific and Technical for free.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 22% five years ago, while capital employed has grown 175%. That being said, Ningbo Changhong Polymer Scientific and Technical raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Ningbo Changhong Polymer Scientific and Technical's earnings and if they change as a result from the capital raise.

On a side note, Ningbo Changhong Polymer Scientific and Technical's current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Ningbo Changhong Polymer Scientific and Technical's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ningbo Changhong Polymer Scientific and Technical. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Ningbo Changhong Polymer Scientific and Technical does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While Ningbo Changhong Polymer Scientific and Technical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.