Zhangjiagang Guangda Special Material (SHSE:688186) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Zhangjiagang Guangda Special Material (SHSE:688186) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Zhangjiagang Guangda Special Material:

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

0.015 = CN¥110m ÷ (CN¥11b - CN¥3.5b) (Based on the trailing twelve months to March 2024).

Therefore, Zhangjiagang Guangda Special Material has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.7%.

Check out our latest analysis for Zhangjiagang Guangda Special Material

In the above chart we have measured Zhangjiagang Guangda Special Material's prior ROCE against its prior performance, but the future is arguably more important. 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 .

What The Trend Of ROCE Can Tell Us

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 1.5% from 19% 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 side note, Zhangjiagang Guangda Special Material has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On Zhangjiagang Guangda Special Material's ROCE

To conclude, we've found that Zhangjiagang Guangda Special Material is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 66% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with Zhangjiagang Guangda Special Material (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

While Zhangjiagang Guangda Special Material may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.