CNGR Advanced MaterialLtd (SZSE:300919) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at CNGR Advanced MaterialLtd (SZSE:300919), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CNGR Advanced MaterialLtd:

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

0.045 = CN¥2.0b ÷ (CN¥60b - CN¥15b) (Based on the trailing twelve months to September 2023).

Thus, CNGR Advanced MaterialLtd has an ROCE of 4.5%. 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 CNGR Advanced MaterialLtd

Above you can see how the current ROCE for CNGR Advanced MaterialLtd 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 CNGR Advanced MaterialLtd .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 9.7% five years ago, while capital employed has grown 3,597%. Usually this isn't ideal, but given CNGR Advanced MaterialLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence CNGR Advanced MaterialLtd might not have received a full period of earnings contribution from it.

On a related note, CNGR Advanced MaterialLtd has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

While returns have fallen for CNGR Advanced MaterialLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing CNGR Advanced MaterialLtd, we've discovered 1 warning sign that you should be aware of.

While CNGR Advanced MaterialLtd 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.