Capital Allocation Trends At Shenzhen Zhongjin Lingnan Nonfemet (SZSE:000060) Aren't Ideal

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Shenzhen Zhongjin Lingnan Nonfemet (SZSE:000060) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Zhongjin Lingnan Nonfemet is:

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

0.053 = CN¥1.8b ÷ (CN¥45b - CN¥12b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Zhongjin Lingnan Nonfemet has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Shenzhen Zhongjin Lingnan Nonfemet

Above you can see how the current ROCE for Shenzhen Zhongjin Lingnan Nonfemet 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 Shenzhen Zhongjin Lingnan Nonfemet .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shenzhen Zhongjin Lingnan Nonfemet doesn't inspire confidence. To be more specific, ROCE has fallen from 6.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shenzhen Zhongjin Lingnan Nonfemet's ROCE

To conclude, we've found that Shenzhen Zhongjin Lingnan Nonfemet is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Zhongjin Lingnan Nonfemet (of which 1 is potentially serious!) 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.