There Are Reasons To Feel Uneasy About Citic Pacific Special Steel Group's (SZSE:000708) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Citic Pacific Special Steel Group (SZSE:000708), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Citic Pacific Special Steel Group is:

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

0.092 = CN¥6.3b ÷ (CN¥113b - CN¥45b) (Based on the trailing twelve months to September 2024).

Thus, Citic Pacific Special Steel Group has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.8% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Citic Pacific Special Steel Group

Above you can see how the current ROCE for Citic Pacific Special Steel Group 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 Citic Pacific Special Steel Group for free.

What Can We Tell From Citic Pacific Special Steel Group's ROCE Trend?

In terms of Citic Pacific Special Steel Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.2% from 22% five years ago. 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'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.

The Bottom Line On Citic Pacific Special Steel Group's ROCE

Bringing it all together, while we're somewhat encouraged by Citic Pacific Special Steel Group'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 6.9% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Citic Pacific Special Steel Group does come with some risks, and we've found 2 warning signs that you should be aware of.

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.