China Tungsten And Hightech MaterialsLtd (SZSE:000657) Hasn't Managed To Accelerate Its Returns

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at China Tungsten And Hightech MaterialsLtd (SZSE:000657) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on China Tungsten And Hightech MaterialsLtd is:

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

0.056 = CN¥465m ÷ (CN¥14b - CN¥5.9b) (Based on the trailing twelve months to September 2024).

So, China Tungsten And Hightech MaterialsLtd has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.0%.

Check out our latest analysis for China Tungsten And Hightech MaterialsLtd

Above you can see how the current ROCE for China Tungsten And Hightech MaterialsLtd 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 China Tungsten And Hightech MaterialsLtd .

What Does the ROCE Trend For China Tungsten And Hightech MaterialsLtd Tell Us?

In terms of China Tungsten And Hightech MaterialsLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, China Tungsten And Hightech MaterialsLtd has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, China Tungsten And Hightech MaterialsLtd has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about China Tungsten And Hightech MaterialsLtd, we've spotted 3 warning signs, and 1 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.