Returns On Capital Signal Tricky Times Ahead For Zhangjiagang Guangda Special Material (SHSE:688186)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhangjiagang Guangda Special Material (SHSE:688186) 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)?

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 Zhangjiagang Guangda Special Material, this is the formula:

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

0.013 = CN¥98m ÷ (CN¥11b - CN¥3.5b) (Based on the trailing twelve months to June 2024).

So, Zhangjiagang Guangda Special Material has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

Check out our latest analysis for Zhangjiagang Guangda Special Material

Above you can see how the current ROCE for Zhangjiagang Guangda Special Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhangjiagang Guangda Special Material .

How Are Returns Trending?

When we looked at the ROCE trend at Zhangjiagang Guangda Special Material, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 18% five years ago. However it looks like Zhangjiagang Guangda Special Material 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.

On a related note, Zhangjiagang Guangda Special Material has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line On Zhangjiagang Guangda Special Material's ROCE

In summary, Zhangjiagang Guangda Special Material is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 74% over the last three years. Therefore based on the analysis done in this article, we don't think Zhangjiagang Guangda Special Material has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Zhangjiagang Guangda Special Material (of which 2 are a bit concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.