Here's What's Concerning About Super-Dragon Engineering Plastics' (SZSE:301131) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Super-Dragon Engineering Plastics (SZSE:301131) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Super-Dragon Engineering Plastics, this is the formula:

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

0.055 = CN¥47m ÷ (CN¥1.6b - CN¥761m) (Based on the trailing twelve months to September 2023).

Thus, Super-Dragon Engineering Plastics has an ROCE of 5.5%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for Super-Dragon Engineering Plastics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Super-Dragon Engineering Plastics' ROCE against it's prior returns. If you'd like to look at how Super-Dragon Engineering Plastics has performed in the past in other metrics, you can view this free graph of Super-Dragon Engineering Plastics' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Super-Dragon Engineering Plastics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 12% five years ago. However it looks like Super-Dragon Engineering Plastics 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, Super-Dragon Engineering Plastics' current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Super-Dragon Engineering Plastics' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 2 warning signs with Super-Dragon Engineering Plastics (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.