Norsyn Crop Technology's (SZSE:001231) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Norsyn Crop Technology (SZSE:001231) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Norsyn Crop Technology is:

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

0.053 = CN¥57m ÷ (CN¥1.2b - CN¥155m) (Based on the trailing twelve months to September 2023).

So, Norsyn Crop Technology has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.7% average generated by the Chemicals industry.

View our latest analysis for Norsyn Crop 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Norsyn Crop Technology.

What Can We Tell From Norsyn Crop Technology's ROCE Trend?

On the surface, the trend of ROCE at Norsyn Crop Technology doesn't inspire confidence. Over the last four years, returns on capital have decreased to 5.3% from 20% four years ago. However it looks like Norsyn Crop Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Norsyn Crop Technology has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Norsyn Crop Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 38% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Norsyn Crop Technology has the makings of a multi-bagger.

If you want to know some of the risks facing Norsyn Crop Technology we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.