There Are Reasons To Feel Uneasy About Chongqing Shunbo AluminumLtd's (SZSE:002996) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. 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.

Understanding 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. 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)

0.033 = CN¥115m ÷ (CN¥7.2b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

Thus, Chongqing Shunbo AluminumLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.3%.

Check out our latest analysis for Chongqing Shunbo AluminumLtd

Above you can see how the current ROCE for Chongqing Shunbo AluminumLtd 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 Chongqing Shunbo AluminumLtd .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 187%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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 52%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Chongqing Shunbo AluminumLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Chongqing Shunbo AluminumLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Chongqing Shunbo AluminumLtd has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chongqing Shunbo AluminumLtd (of which 1 is a bit concerning!) that you should know about.

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.