The Returns On Capital At Ningbo Runhe High-Tech Materials (SZSE:300727) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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?

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 Ningbo Runhe High-Tech Materials, this is the formula:

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

0.078 = CN¥93m ÷ (CN¥1.5b - CN¥353m) (Based on the trailing twelve months to March 2024).

So, Ningbo Runhe High-Tech Materials has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

View 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.

What Does the ROCE Trend For Ningbo Runhe High-Tech Materials Tell Us?

In terms of Ningbo Runhe High-Tech Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Ningbo Runhe High-Tech Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Ningbo Runhe High-Tech Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with Ningbo Runhe High-Tech Materials and understanding these should be part of your investment process.

While Ningbo Runhe High-Tech Materials 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.

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