Henan Liliang Diamond's (SZSE:301071) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Henan Liliang Diamond (SZSE:301071) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Henan Liliang Diamond is:

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

0.054 = CN¥303m ÷ (CN¥6.8b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Thus, Henan Liliang Diamond has an ROCE of 5.4%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for Henan Liliang Diamond

In the above chart we have measured Henan Liliang Diamond's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Henan Liliang Diamond .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Henan Liliang Diamond, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 5.4%. However it looks like Henan Liliang Diamond 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Henan Liliang Diamond is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Henan Liliang Diamond we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Henan Liliang Diamond 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.