Returns On Capital At GuangDong Leary New Material TechnologyLtd (SHSE:688683) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 GuangDong Leary New Material TechnologyLtd (SHSE:688683) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for GuangDong Leary New Material TechnologyLtd:

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

0.021 = CN¥25m ÷ (CN¥1.4b - CN¥152m) (Based on the trailing twelve months to September 2024).

Thus, GuangDong Leary New Material TechnologyLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

View our latest analysis for GuangDong Leary New Material TechnologyLtd

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GuangDong Leary New Material TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 2.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From GuangDong Leary New Material TechnologyLtd's ROCE

To conclude, we've found that GuangDong Leary New Material TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 19% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for GuangDong Leary New Material TechnologyLtd that we think you should be aware of.

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.