Investors Could Be Concerned With Ganfeng Lithium Group's (SZSE:002460) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Ganfeng Lithium Group (SZSE:002460) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Ganfeng Lithium Group:

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

0.0052 = CN¥375m ÷ (CN¥92b - CN¥20b) (Based on the trailing twelve months to December 2023).

So, Ganfeng Lithium Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.8%.

Check out our latest analysis for Ganfeng Lithium Group

In the above chart we have measured Ganfeng Lithium Group'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 Ganfeng Lithium Group .

The Trend Of ROCE

When we looked at the ROCE trend at Ganfeng Lithium Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Ganfeng Lithium Group have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 118% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Ganfeng Lithium Group (1 is a bit unpleasant) you should be aware of.

While Ganfeng Lithium Group 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.