Here's What's Concerning About China Daye Non-Ferrous Metals Mining's (HKG:661) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 China Daye Non-Ferrous Metals Mining (HKG:661) and its ROCE trend, we weren't exactly thrilled.

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Understanding 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. Analysts use this formula to calculate it for China Daye Non-Ferrous Metals Mining:

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

0.044 = CN¥594m ÷ (CN¥26b - CN¥12b) (Based on the trailing twelve months to December 2024).

Thus, China Daye Non-Ferrous Metals Mining has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.

See our latest analysis for China Daye Non-Ferrous Metals Mining

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Daye Non-Ferrous Metals Mining's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Daye Non-Ferrous Metals Mining.

The Trend Of ROCE

When we looked at the ROCE trend at China Daye Non-Ferrous Metals Mining, we didn't gain much confidence. Around five years ago the returns on capital were 6.9%, but since then they've fallen to 4.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, China Daye Non-Ferrous Metals Mining has a high ratio of current liabilities to total assets of 48%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

While returns have fallen for China Daye Non-Ferrous Metals Mining in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 32% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

China Daye Non-Ferrous Metals Mining does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.