Chongqing Shunbo AluminumLtd (SZSE:002996) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Chongqing Shunbo AluminumLtd (SZSE:002996) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Chongqing Shunbo AluminumLtd, this is the formula:

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

0.054 = CN¥246m ÷ (CN¥10b - CN¥5.7b) (Based on the trailing twelve months to June 2024).

Therefore, Chongqing Shunbo AluminumLtd has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.9%.

View our latest analysis for Chongqing Shunbo AluminumLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chongqing Shunbo AluminumLtd's ROCE against it's prior returns. If you're interested in investigating Chongqing Shunbo AluminumLtd's past further, check out this free graph covering Chongqing Shunbo AluminumLtd's past earnings, revenue and cash flow.

What Can We Tell From Chongqing Shunbo AluminumLtd's ROCE Trend?

We weren't thrilled with the trend because Chongqing Shunbo AluminumLtd's ROCE has reduced by 67% over the last five years, while the business employed 237% more capital. That being said, Chongqing Shunbo AluminumLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Chongqing Shunbo AluminumLtd's earnings and if they change as a result from the capital raise.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 55%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

While returns have fallen for Chongqing Shunbo AluminumLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Chongqing Shunbo AluminumLtd, we've spotted 4 warning signs, and 2 of them are a bit concerning.

While Chongqing Shunbo AluminumLtd 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.