Slowing Rates Of Return At Tibet GaoZheng Explosive (SZSE:002827) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Tibet GaoZheng Explosive (SZSE:002827) 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)?

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 Tibet GaoZheng Explosive:

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

0.086 = CN¥149m ÷ (CN¥2.5b - CN¥796m) (Based on the trailing twelve months to September 2023).

Thus, Tibet GaoZheng Explosive has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.7% generated by the Chemicals industry, it's much better.

See our latest analysis for Tibet GaoZheng Explosive

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tibet GaoZheng Explosive has performed in the past in other metrics, you can view this free graph of Tibet GaoZheng Explosive's past earnings, revenue and cash flow.

What Does the ROCE Trend For Tibet GaoZheng Explosive Tell Us?

There are better returns on capital out there than what we're seeing at Tibet GaoZheng Explosive. The company has employed 110% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. 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.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than8.6% because total capital employed would be higher.The 8.6% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Tibet GaoZheng Explosive's ROCE

In conclusion, Tibet GaoZheng Explosive has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Tibet GaoZheng Explosive does have some risks though, and we've spotted 1 warning sign for Tibet GaoZheng Explosive that you might be interested in.

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.