The Returns On Capital At Baowu Magnesium Technology (SZSE:002182) Don't Inspire Confidence

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Baowu Magnesium Technology (SZSE:002182), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Baowu Magnesium Technology is:

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

0.044 = CN¥367m ÷ (CN¥13b - CN¥4.3b) (Based on the trailing twelve months to September 2024).

Thus, Baowu Magnesium Technology has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Baowu Magnesium Technology

In the above chart we have measured Baowu Magnesium Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Baowu Magnesium Technology .

So How Is Baowu Magnesium Technology's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.7% five years ago, while capital employed has grown 244%. Usually this isn't ideal, but given Baowu Magnesium Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Baowu Magnesium Technology's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

On a related note, Baowu Magnesium Technology has decreased its current liabilities to 34% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Baowu Magnesium Technology's ROCE

While returns have fallen for Baowu Magnesium Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 61% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Baowu Magnesium Technology we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.