Some Investors May Be Worried About Super-Dragon Engineering Plastics' (SZSE:301131) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Super-Dragon Engineering Plastics (SZSE:301131), 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. 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)

0.034 = CN¥41m ÷ (CN¥1.9b - CN¥702m) (Based on the trailing twelve months to September 2024).

So, Super-Dragon Engineering Plastics has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

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.

The Trend Of ROCE

In terms of Super-Dragon Engineering Plastics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Super-Dragon Engineering Plastics has done well to pay down its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Super-Dragon Engineering Plastics' ROCE

While returns have fallen for Super-Dragon Engineering Plastics 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 24% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Super-Dragon Engineering Plastics does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Super-Dragon Engineering Plastics 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.