If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Shandong Linuo Technical GlassLtd (SZSE:301188) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. To calculate this metric for Shandong Linuo Technical GlassLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥56m ÷ (CN¥2.1b - CN¥155m) (Based on the trailing twelve months to September 2023).
Therefore, Shandong Linuo Technical GlassLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.4%.
Above you can see how the current ROCE for Shandong Linuo Technical GlassLtd 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 analyst report for Shandong Linuo Technical GlassLtd .
How Are Returns Trending?
In terms of Shandong Linuo Technical GlassLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 2.9%. 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, Shandong Linuo Technical GlassLtd has done well to pay down its current liabilities to 7.4% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Shandong Linuo Technical GlassLtd's ROCE
While returns have fallen for Shandong Linuo Technical GlassLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 10% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Shandong Linuo Technical GlassLtd does have some risks though, and we've spotted 3 warning signs for Shandong Linuo Technical GlassLtd that you might be interested in.
While Shandong Linuo Technical GlassLtd 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.