I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in China Advanced Construction Materials Group Inc (NASDAQ:CADC).

Buying China Advanced Construction Materials Group makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to CADC’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently China Advanced Construction Materials Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Check out our latest analysis for China Advanced Construction Materials Group

### Calculating Return On Capital Employed for CADC

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if China Advanced Construction Materials Group is good at growing investor capital. I have calculated China Advanced Construction Materials Group’s ROCE for you below:

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$623.10K ÷ (US\$66.75M – US\$54.97M) = 5.29%

CADC’s 5.29% ROCE means that for every \$100 you invest, the company creates \$5.3. Comparing this to a healthy 15% benchmark shows China Advanced Construction Materials Group is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

### Then why have investors invested?

Although China Advanced Construction Materials Group is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, CADC’s ROCE was -10.90%, which means the company’s capital returns have improved. Over the same period, EBT went from -US\$4.47M to US\$623.10K and capital employed has declined in response to a fall in total assets , which is an indication that China Advanced Construction Materials Group has increased the ROCE for investors by producing more earnings and using less capital.

### Next Steps

ROCE for CADC investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like the management team and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate CADC or move on to other alternatives.

1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for China Advanced Construction Materials Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
2. Valuation: What is CADC worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether CADC is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.