China Rare Earth Resources And Technology (SZSE:000831) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China Rare Earth Resources And Technology (SZSE:000831) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 China Rare Earth Resources And Technology is:

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

0.012 = CN¥59m ÷ (CN¥5.2b - CN¥400m) (Based on the trailing twelve months to September 2024).

Therefore, China Rare Earth Resources And Technology has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

Check out our latest analysis for China Rare Earth Resources And Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Rare Earth Resources And Technology's past further, check out this free graph covering China Rare Earth Resources And Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because China Rare Earth Resources And Technology's ROCE has reduced by 70% over the last five years, while the business employed 106% more capital. That being said, China Rare Earth Resources And Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence China Rare Earth Resources And Technology might not have received a full period of earnings contribution from it.

What We Can Learn From China Rare Earth Resources And Technology's ROCE

In summary, we're somewhat concerned by China Rare Earth Resources And Technology's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 121%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing China Rare Earth Resources And Technology that you might find interesting.

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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.