The Returns On Capital At Sansteel MinGuangLtd.Fujian (SZSE:002110) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Sansteel MinGuangLtd.Fujian (SZSE:002110) 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)?

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 Sansteel MinGuangLtd.Fujian:

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

0.018 = CN¥418m ÷ (CN¥50b - CN¥27b) (Based on the trailing twelve months to September 2023).

Therefore, Sansteel MinGuangLtd.Fujian has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.3%.

Check out our latest analysis for Sansteel MinGuangLtd.Fujian

In the above chart we have measured Sansteel MinGuangLtd.Fujian's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sansteel MinGuangLtd.Fujian for free.

So How Is Sansteel MinGuangLtd.Fujian's ROCE Trending?

On the surface, the trend of ROCE at Sansteel MinGuangLtd.Fujian doesn't inspire confidence. To be more specific, ROCE has fallen from 56% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Sansteel MinGuangLtd.Fujian's current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Sansteel MinGuangLtd.Fujian's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sansteel MinGuangLtd.Fujian have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Sansteel MinGuangLtd.Fujian and understanding it should be part of your investment process.

While Sansteel MinGuangLtd.Fujian isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.