Global New Material International Holdings (HKG:6616) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Global New Material International Holdings (HKG:6616) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Global New Material International Holdings:

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

0.085 = CN¥200m ÷ (CN¥2.6b - CN¥255m) (Based on the trailing twelve months to December 2021).

So, Global New Material International Holdings has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

View 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 want to delve into the historical earnings, revenue and cash flow of Global New Material International Holdings, check out these free graphs here.

So How Is Global New Material International Holdings' ROCE Trending?

In terms of Global New Material International Holdings' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 8.5% from 22% three 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.

On a side note, Global New Material International Holdings has done well to pay down its current liabilities to 9.8% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Global New Material International Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Global New Material International Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 10% to shareholders over the last year. 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.

Like most companies, Global New Material International Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Global New Material International Holdings 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. 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.