If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Yangzhou Seashine New MaterialsLtd (SZSE:300885), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Yangzhou Seashine New MaterialsLtd, this is the formula:

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

0.016 = CN¥13m ÷ (CN¥849m - CN¥42m) (Based on the trailing twelve months to June 2023).

Thus, Yangzhou Seashine New MaterialsLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.2%.

Check out our latest analysis for Yangzhou Seashine New MaterialsLtd

Above you can see how the current ROCE for Yangzhou Seashine New MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yangzhou Seashine New MaterialsLtd.

So How Is Yangzhou Seashine New MaterialsLtd's ROCE Trending?

When we looked at the ROCE trend at Yangzhou Seashine New MaterialsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 22% five 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Yangzhou Seashine New MaterialsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 0.5% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for Yangzhou Seashine New MaterialsLtd (1 is a bit concerning) you should be aware of.

While Yangzhou Seashine New MaterialsLtd 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.