Ningbo Color Master Batch's (SZSE:301019) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Ningbo Color Master Batch (SZSE:301019) 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. Analysts use this formula to calculate it for Ningbo Color Master Batch:

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

0.083 = CN¥92m ÷ (CN¥1.2b - CN¥84m) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Color Master Batch has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Ningbo Color Master Batch

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Color Master Batch's ROCE against it's prior returns. If you're interested in investigating Ningbo Color Master Batch's past further, check out this free graph covering Ningbo Color Master Batch's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ningbo Color Master Batch doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.3% from 29% five years ago. However it looks like Ningbo Color Master Batch 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.

On a side note, Ningbo Color Master Batch has done well to pay down its current liabilities to 7.0% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Ningbo Color Master Batch's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 16% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 2 warning signs facing Ningbo Color Master Batch that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.