Is China Metal Resources Utilization (HKG:1636) Set To Make A Turnaround?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, China Metal Resources Utilization (HKG:1636) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Metal Resources Utilization is:

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

0.063 = CN¥111m ÷ (CN¥6.1b - CN¥4.4b) (Based on the trailing twelve months to June 2020).

So, China Metal Resources Utilization has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.5% average generated by the Metals and Mining industry.

See our latest analysis for China Metal Resources Utilization

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

How Are Returns Trending?

In terms of China Metal Resources Utilization's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect China Metal Resources Utilization to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 71%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, it's unfortunate that China Metal Resources Utilization is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 90% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

China Metal Resources Utilization does have some risks though, and we've spotted 2 warning signs for China Metal Resources Utilization that you might be interested in.

While China Metal Resources Utilization 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. 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.
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