share_log

Ganfeng Lithium Group (SZSE:002460) Is Reinvesting At Lower Rates Of Return

Simply Wall St ·  Feb 22 18:43

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Ganfeng Lithium Group (SZSE:002460) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ganfeng Lithium Group is:

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

0.097 = CN¥7.1b ÷ (CN¥93b - CN¥20b) (Based on the trailing twelve months to September 2023).

So, Ganfeng Lithium Group has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.7% generated by the Chemicals industry, it's much better.

roce
SZSE:002460 Return on Capital Employed February 22nd 2024

Above you can see how the current ROCE for Ganfeng Lithium Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ganfeng Lithium Group for free.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 28% five years ago, while capital employed has grown 1,038%. That being said, Ganfeng Lithium Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Ganfeng Lithium Group might not have received a full period of earnings contribution from it.

The Bottom Line On Ganfeng Lithium Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ganfeng Lithium Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 95% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Ganfeng Lithium Group we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Ganfeng Lithium Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
    Write a comment