Returns On Capital At Ningbo Runhe High-Tech Materials (SZSE:300727) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ningbo Runhe High-Tech Materials (SZSE:300727), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Ningbo Runhe High-Tech Materials:

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

0.085 = CN¥104m ÷ (CN¥1.7b - CN¥469m) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Runhe High-Tech Materials has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.4%.

Check out our latest analysis for Ningbo Runhe High-Tech Materials

In the above chart we have measured Ningbo Runhe High-Tech Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ningbo Runhe High-Tech Materials for free.

How Are Returns Trending?

When we looked at the ROCE trend at Ningbo Runhe High-Tech Materials, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.5% from 11% 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. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Ningbo Runhe High-Tech Materials' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ningbo Runhe High-Tech Materials. Furthermore the stock has climbed 83% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Ningbo Runhe High-Tech Materials, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.