Be Wary Of Shandong Linuo Technical GlassLtd (SZSE:301188) And Its 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Shandong Linuo Technical GlassLtd (SZSE:301188) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shandong Linuo Technical GlassLtd:

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

0.029 = CN¥56m ÷ (CN¥2.1b - CN¥155m) (Based on the trailing twelve months to September 2023).

Therefore, Shandong Linuo Technical GlassLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.7%.

View our latest analysis for Shandong Linuo Technical GlassLtd

Above you can see how the current ROCE for Shandong Linuo Technical GlassLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shandong Linuo Technical GlassLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Shandong Linuo Technical GlassLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.9% from 20% 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, Shandong Linuo Technical GlassLtd has done well to pay down its current liabilities to 7.4% 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shandong Linuo Technical GlassLtd. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Shandong Linuo Technical GlassLtd, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Shandong Linuo Technical GlassLtd 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.