CNNC Hua Yuan Titanium Dioxide (SZSE:002145) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at CNNC Hua Yuan Titanium Dioxide (SZSE:002145) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CNNC Hua Yuan Titanium Dioxide:

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

0.03 = CN¥400m ÷ (CN¥19b - CN¥5.8b) (Based on the trailing twelve months to September 2024).

Therefore, CNNC Hua Yuan Titanium Dioxide has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

View our latest analysis for CNNC Hua Yuan Titanium Dioxide

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'd like to look at how CNNC Hua Yuan Titanium Dioxide has performed in the past in other metrics, you can view this free graph of CNNC Hua Yuan Titanium Dioxide's past earnings, revenue and cash flow.

What Can We Tell From CNNC Hua Yuan Titanium Dioxide's ROCE Trend?

In terms of CNNC Hua Yuan Titanium Dioxide's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CNNC Hua Yuan Titanium Dioxide. Furthermore the stock has climbed 44% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with CNNC Hua Yuan Titanium Dioxide (including 1 which makes us a bit uncomfortable) .

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.