Slowing Rates Of Return At Western Metal Materials (SZSE:002149) Leave Little Room For Excitement

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Western Metal Materials (SZSE:002149), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Western Metal Materials:

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

0.064 = CN¥250m ÷ (CN¥6.9b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Thus, Western Metal Materials has an ROCE of 6.4%. On its own, that's a low figure but it's around the 6.7% average generated by the Metals and Mining industry.

View our latest analysis for Western Metal Materials

Above you can see how the current ROCE for Western Metal Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Western Metal Materials .

So How Is Western Metal Materials' ROCE Trending?

The returns on capital haven't changed much for Western Metal Materials in recent years. The company has employed 62% more capital in the last five years, and the returns on that capital have remained stable at 6.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, Western Metal Materials has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Western Metal Materials' ROCE

Long story short, while Western Metal Materials has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Western Metal Materials, we've discovered 2 warning signs that you should be aware of.

While Western Metal Materials 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com