Returns At Guangdong Haomei New MaterialsLtd (SZSE:002988) Appear To Be Weighed Down

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Guangdong Haomei New MaterialsLtd (SZSE:002988) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Guangdong Haomei New MaterialsLtd is:

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

0.093 = CN¥347m ÷ (CN¥6.2b - CN¥2.5b) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Haomei New MaterialsLtd has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.8%.

Check out our latest analysis for Guangdong Haomei New MaterialsLtd

Above you can see how the current ROCE for Guangdong Haomei New MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Haomei New MaterialsLtd .

What Can We Tell From Guangdong Haomei New MaterialsLtd's ROCE Trend?

In terms of Guangdong Haomei New MaterialsLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.3% for the last five years, and the capital employed within the business has risen 130% 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...

Long story short, while Guangdong Haomei New MaterialsLtd has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 10% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for Guangdong Haomei New MaterialsLtd (1 doesn't sit too well with us) 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.