Returns On Capital At Guangzhou Newlife New Material (SZSE:301323) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangzhou Newlife New Material (SZSE:301323), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Guangzhou Newlife New Material:

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

0.06 = CN¥122m ÷ (CN¥2.1b - CN¥93m) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Newlife New Material has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.5% average generated by the Chemicals industry.

View our latest analysis for Guangzhou Newlife New Material

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guangzhou Newlife New Material doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.0% from 21% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Guangzhou Newlife New Material has done well to pay down its current liabilities to 4.4% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Guangzhou Newlife New Material's ROCE

While returns have fallen for Guangzhou Newlife New Material 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 33% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Guangzhou Newlife New Material that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.