Super-Dragon Engineering Plastics (SZSE:301131) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)

0.064 = CN¥59m ÷ (CN¥1.7b - CN¥814m) (Based on the trailing twelve months to March 2024).

Thus, Super-Dragon Engineering Plastics has an ROCE of 6.4%. On its own, that's a low figure but it's around the 5.5% average generated by the Chemicals industry.

See our latest analysis for Super-Dragon Engineering Plastics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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

When we looked at the ROCE trend at Super-Dragon Engineering Plastics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.4% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 47% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From 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. In light of this, the stock has only gained 0.7% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Super-Dragon Engineering Plastics does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those don't sit too well with us...

While Super-Dragon Engineering Plastics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com