Ningbo Energy GroupLtd (SHSE:600982) Might Be Having Difficulty Using Its Capital Effectively

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ningbo Energy GroupLtd (SHSE:600982) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Ningbo Energy GroupLtd is:

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

0.019 = CN¥175m ÷ (CN¥15b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

So, Ningbo Energy GroupLtd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.3%.

Check out our latest analysis for Ningbo Energy GroupLtd

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

How Are Returns Trending?

In terms of Ningbo Energy GroupLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.3% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Ningbo Energy GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 108%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Ningbo Energy GroupLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.