Some Investors May Be Worried About NanJing Sanchao Advanced MaterialsLtd's (SZSE:300554) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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 briefly looking over the numbers, we don't think NanJing Sanchao Advanced MaterialsLtd (SZSE:300554) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on NanJing Sanchao Advanced MaterialsLtd is:

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

0.029 = CN¥25m ÷ (CN¥1.2b - CN¥296m) (Based on the trailing twelve months to September 2023).

So, NanJing Sanchao Advanced MaterialsLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.8%.

See our latest analysis for NanJing Sanchao Advanced MaterialsLtd

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're interested in investigating NanJing Sanchao Advanced MaterialsLtd's past further, check out this free graph covering NanJing Sanchao Advanced MaterialsLtd's past earnings, revenue and cash flow.

So How Is NanJing Sanchao Advanced MaterialsLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 24% five years ago, while the business's capital employed increased by 60%. That being said, NanJing Sanchao Advanced MaterialsLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence NanJing Sanchao Advanced MaterialsLtd might not have received a full period of earnings contribution from it.

In Conclusion...

While returns have fallen for NanJing Sanchao Advanced MaterialsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with NanJing Sanchao Advanced MaterialsLtd (including 2 which are a bit concerning) .

While NanJing Sanchao Advanced MaterialsLtd 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.