Returns On Capital At Chongyi Zhangyuan Tungsten (SZSE:002378) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Chongyi Zhangyuan Tungsten (SZSE:002378), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chongyi Zhangyuan Tungsten is:

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

0.067 = CN¥190m ÷ (CN¥4.8b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

So, Chongyi Zhangyuan Tungsten has an ROCE of 6.7%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

View our latest analysis for Chongyi Zhangyuan Tungsten

Above you can see how the current ROCE for Chongyi Zhangyuan Tungsten compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chongyi Zhangyuan Tungsten for free.

The Trend Of ROCE

Things have been pretty stable at Chongyi Zhangyuan Tungsten, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Chongyi Zhangyuan Tungsten in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Chongyi Zhangyuan Tungsten has been paying out a decent 40% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

On a side note, Chongyi Zhangyuan Tungsten's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Chongyi Zhangyuan Tungsten's ROCE

We can conclude that in regards to Chongyi Zhangyuan Tungsten's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 21% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Chongyi Zhangyuan Tungsten does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.

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