Sinosteel Luonai Materials Technology's (SHSE:688119) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Sinosteel Luonai Materials Technology (SHSE:688119) 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)?

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. Analysts use this formula to calculate it for Sinosteel Luonai Materials Technology:

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

0.0069 = CN¥26m ÷ (CN¥5.6b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Thus, Sinosteel Luonai Materials Technology has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.1%.

See our latest analysis for Sinosteel Luonai Materials Technology

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

The Trend Of ROCE

When we looked at the ROCE trend at Sinosteel Luonai Materials Technology, we didn't gain much confidence. Around four years ago the returns on capital were 9.9%, but since then they've fallen to 0.7%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Sinosteel Luonai Materials Technology has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Sinosteel Luonai Materials Technology's ROCE

In summary, we're somewhat concerned by Sinosteel Luonai Materials Technology's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Sinosteel Luonai Materials Technology (including 1 which is a bit concerning) .

While Sinosteel Luonai Materials 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.