Cetc Potevio Science&TechnologyLtd's (SZSE:002544) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Cetc Potevio Science&TechnologyLtd (SZSE:002544) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Cetc Potevio Science&TechnologyLtd is:

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

0.036 = CN¥149m ÷ (CN¥10b - CN¥6.1b) (Based on the trailing twelve months to September 2023).

So, Cetc Potevio Science&TechnologyLtd has an ROCE of 3.6%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

See our latest analysis for Cetc Potevio Science&TechnologyLtd

In the above chart we have measured Cetc Potevio Science&TechnologyLtd'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 Cetc Potevio Science&TechnologyLtd .

So How Is Cetc Potevio Science&TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Cetc Potevio Science&TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.5% over the last five years. However it looks like Cetc Potevio Science&TechnologyLtd 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 may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Cetc Potevio Science&TechnologyLtd has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Cetc Potevio Science&TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with Cetc Potevio Science&TechnologyLtd and understanding this should be part of your investment process.

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.