There Are Reasons To Feel Uneasy About Yangling Metron New Material's (SZSE:300861) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while Yangling Metron New Material (SZSE:300861) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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 Yangling Metron New Material, this is the formula:

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

0.23 = CN¥1.6b ÷ (CN¥7.6b - CN¥663m) (Based on the trailing twelve months to March 2024).

Thus, Yangling Metron New Material has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 3.9% earned by companies in a similar industry.

Check out our latest analysis for Yangling Metron New Material

In the above chart we have measured Yangling Metron New Material's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Yangling Metron New Material .

How Are Returns Trending?

In terms of Yangling Metron New Material's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 59% where it was five years ago. However it looks like Yangling Metron New Material might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Yangling Metron New Material is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Yangling Metron New Material has the makings of a multi-bagger.

If you want to know some of the risks facing Yangling Metron New Material we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.