Returns On Capital Signal Tricky Times Ahead For Sichuan Anning Iron and TitaniumLtd (SZSE:002978)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Sichuan Anning Iron and TitaniumLtd (SZSE:002978), it didn't seem to tick all of these boxes.

Understanding 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 Sichuan Anning Iron and TitaniumLtd, this is the formula:

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

0.16 = CN¥1.0b ÷ (CN¥7.7b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Sichuan Anning Iron and TitaniumLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 6.8% it's much better.

Check out our latest analysis for Sichuan Anning Iron and TitaniumLtd

Above you can see how the current ROCE for Sichuan Anning Iron and TitaniumLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sichuan Anning Iron and TitaniumLtd .

So How Is Sichuan Anning Iron and TitaniumLtd's ROCE Trending?

When we looked at the ROCE trend at Sichuan Anning Iron and TitaniumLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. However it looks like Sichuan Anning Iron and TitaniumLtd 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 Key Takeaway

Bringing it all together, while we're somewhat encouraged by Sichuan Anning Iron and TitaniumLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Sichuan Anning Iron and TitaniumLtd we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

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.