Returns On Capital At Do-Fluoride New Materials (SZSE:002407) Have Stalled

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 briefly looking over the numbers, we don't think Do-Fluoride New Materials (SZSE:002407) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Do-Fluoride New Materials, this is the formula:

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

0.041 = CN¥634m ÷ (CN¥23b - CN¥7.2b) (Based on the trailing twelve months to December 2023).

Thus, Do-Fluoride New Materials has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.0%.

View our latest analysis for Do-Fluoride New Materials

In the above chart we have measured Do-Fluoride New Materials' 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 Do-Fluoride New Materials for free.

What The Trend Of ROCE Can Tell Us

In terms of Do-Fluoride New Materials' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.1% for the last five years, and the capital employed within the business has risen 204% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In conclusion, Do-Fluoride New Materials has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 29% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Do-Fluoride New Materials does come with some risks, and we've found 3 warning signs that you should be aware of.

While Do-Fluoride New Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.