Investors Could Be Concerned With Luoyang Jianlong Micro-nano New Material's (SHSE:688357) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Luoyang Jianlong Micro-nano New Material (SHSE:688357), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Luoyang Jianlong Micro-nano New Material is:

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

0.059 = CN¥143m ÷ (CN¥2.9b - CN¥471m) (Based on the trailing twelve months to June 2024).

Therefore, Luoyang Jianlong Micro-nano New Material has an ROCE of 5.9%. On its own, that's a low figure but it's around the 5.5% average generated by the Chemicals industry.

Check out our latest analysis for Luoyang Jianlong Micro-nano New Material

In the above chart we have measured Luoyang Jianlong Micro-nano New 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 Luoyang Jianlong Micro-nano New Material .

What Does the ROCE Trend For Luoyang Jianlong Micro-nano New Material Tell Us?

On the surface, the trend of ROCE at Luoyang Jianlong Micro-nano New Material doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 5.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, Luoyang Jianlong Micro-nano New Material has done well to pay down its current liabilities to 16% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Luoyang Jianlong Micro-nano New Material's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Luoyang Jianlong Micro-nano New Material have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing Luoyang Jianlong Micro-nano New Material that you might find interesting.

While Luoyang Jianlong Micro-nano New Material 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.