Returns On Capital Signal Tricky Times Ahead For COFCO Biotechnology (SZSE:000930)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at COFCO Biotechnology (SZSE:000930) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for COFCO Biotechnology:

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

0.013 = CN¥150m ÷ (CN¥17b - CN¥5.9b) (Based on the trailing twelve months to September 2023).

Therefore, COFCO Biotechnology has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for COFCO Biotechnology

Historical performance is a great place to start when researching a stock so above you can see the gauge for COFCO Biotechnology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of COFCO Biotechnology.

What Does the ROCE Trend For COFCO Biotechnology Tell Us?

When we looked at the ROCE trend at COFCO Biotechnology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 44% 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.

On a side note, COFCO Biotechnology has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On COFCO Biotechnology's ROCE

To conclude, we've found that COFCO Biotechnology is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 2 warning signs for COFCO Biotechnology that we think you should be aware of.

While COFCO Biotechnology 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.

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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.