Elite Color Environmental Resources Science & Technology (SZSE:002998) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Elite Color Environmental Resources Science & Technology (SZSE:002998), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Elite Color Environmental Resources Science & Technology, this is the formula:

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

0.046 = CN¥104m ÷ (CN¥2.4b - CN¥206m) (Based on the trailing twelve months to June 2023).

So, Elite Color Environmental Resources Science & Technology has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for Elite Color Environmental Resources Science & Technology

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're interested in investigating Elite Color Environmental Resources Science & Technology's past further, check out this free graph covering Elite Color Environmental Resources Science & Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Elite Color Environmental Resources Science & Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.6% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Elite Color Environmental Resources Science & Technology has done well to pay down its current liabilities to 8.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Elite Color Environmental Resources Science & Technology's ROCE

While returns have fallen for Elite Color Environmental Resources Science & Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Elite Color Environmental Resources Science & Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Elite Color Environmental Resources Science & Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.