Shenzhen Zhongjin Lingnan Nonfemet (SZSE:000060) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen Zhongjin Lingnan Nonfemet (SZSE:000060) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Shenzhen Zhongjin Lingnan Nonfemet:

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

0.052 = CN¥1.7b ÷ (CN¥45b - CN¥13b) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Zhongjin Lingnan Nonfemet has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

View 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 Can We Tell From Shenzhen Zhongjin Lingnan Nonfemet's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Zhongjin Lingnan Nonfemet doesn't inspire confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 5.2%. 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'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.

Our Take On Shenzhen Zhongjin Lingnan Nonfemet's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Zhongjin Lingnan Nonfemet's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 32% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Shenzhen Zhongjin Lingnan Nonfemet does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Shenzhen Zhongjin Lingnan Nonfemet 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.