China Graphite Group (HKG:2237) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think China Graphite Group (HKG:2237) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China Graphite Group:

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

0.046 = CN¥21m ÷ (CN¥576m - CN¥118m) (Based on the trailing twelve months to December 2023).

Thus, China Graphite Group has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.

View our latest analysis for China Graphite Group

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

The Trend Of ROCE

In terms of China Graphite Group's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 4.6% from 27% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, China Graphite Group has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On China Graphite Group's ROCE

In summary, we're somewhat concerned by China Graphite Group's diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 73% over the last year, 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.

One more thing, we've spotted 2 warning signs facing China Graphite Group that you might find interesting.

While China Graphite Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.