Hunan Kaimeite Gases (SZSE:002549) Might Be Having Difficulty Using Its Capital Effectively

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hunan Kaimeite Gases (SZSE:002549), it didn't seem to tick all of these boxes.

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 Hunan Kaimeite Gases:

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

0.0055 = CN¥12m ÷ (CN¥2.9b - CN¥677m) (Based on the trailing twelve months to September 2023).

Thus, Hunan Kaimeite Gases has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

View our latest analysis for Hunan Kaimeite Gases

In the above chart we have measured Hunan Kaimeite Gases' 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 Hunan Kaimeite Gases for free.

The Trend Of ROCE

In terms of Hunan Kaimeite Gases' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 10% five years ago. However it looks like Hunan Kaimeite Gases might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hunan Kaimeite Gases' ROCE

Bringing it all together, while we're somewhat encouraged by Hunan Kaimeite Gases' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 20% 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.

If you'd like to know about the risks facing Hunan Kaimeite Gases, we've discovered 4 warning signs that you should be aware of.

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.