Be Wary Of Global New Material International Holdings (HKG:6616) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Global New Material International Holdings (HKG:6616), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Global New Material International Holdings, this is the formula:

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

0.091 = CN¥531m ÷ (CN¥7.1b - CN¥1.2b) (Based on the trailing twelve months to December 2024).

Therefore, Global New Material International Holdings has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 7.1% generated by the Chemicals industry, it's much better.

See our latest analysis for Global New Material International Holdings

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

What The Trend Of ROCE Can Tell Us

In terms of Global New Material International Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.1% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 17%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Global New Material International Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Global New Material International Holdings. Furthermore the stock has climbed 46% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Global New Material International Holdings does have some risks though, and we've spotted 1 warning sign for Global New Material International Holdings that you might be interested in.

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.