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

There are a few key trends to look for if we want to identify the next multi-bagger. 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?

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. To calculate this metric for Shenzhen Zhongjin Lingnan Nonfemet, this is the formula:

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

0.052 = CN¥1.7b ÷ (CN¥45b - CN¥12b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Zhongjin Lingnan Nonfemet has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.

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, you can check out the forecasts from the analysts covering Shenzhen Zhongjin Lingnan Nonfemet for free.

How Are Returns Trending?

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 10%, but since then they've fallen to 5.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Zhongjin Lingnan Nonfemet. These trends are starting to be recognized by investors since the stock has delivered a 7.2% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Zhongjin Lingnan Nonfemet (including 1 which can't be ignored) .

While Shenzhen Zhongjin Lingnan Nonfemet 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com