Investors Could Be Concerned With Nanjing Hanrui CobaltLtd's (SZSE:300618) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Nanjing Hanrui CobaltLtd (SZSE:300618) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Nanjing Hanrui CobaltLtd is:

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

0.03 = CN¥168m ÷ (CN¥7.5b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

Therefore, Nanjing Hanrui CobaltLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.4%.

See our latest analysis for Nanjing Hanrui CobaltLtd

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 Nanjing Hanrui CobaltLtd's past further, check out this free graph covering Nanjing Hanrui CobaltLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Nanjing Hanrui CobaltLtd Tell Us?

We weren't thrilled with the trend because Nanjing Hanrui CobaltLtd's ROCE has reduced by 94% over the last five years, while the business employed 142% more capital. Usually this isn't ideal, but given Nanjing Hanrui CobaltLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Nanjing Hanrui CobaltLtd's earnings and if they change as a result from the capital raise.

In Conclusion...

To conclude, we've found that Nanjing Hanrui CobaltLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 55% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Nanjing Hanrui CobaltLtd, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Nanjing Hanrui CobaltLtd 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.