Luoyang Glass (HKG: 1108) experiences growth in return on capital

What are the first trends to look for to identify a title that could multiply over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Luoyang glass (HKG: 1108) so let’s look a little deeper.

Return on capital employed (ROCE): what is it?

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Luoyang glass, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.16 = CN ¥ 870m ÷ (CN ¥ 9.8b – CN ¥ 4.3b) (Based on the last twelve months up to September 2021).

Thereby, Luoyang Glass has a ROCE of 16%. By itself, this is a normal return on capital and is in line with industry average returns of 16%.

See our latest review for Luoyang Glass

SEHK: 1108 Return on capital employed on January 11, 2022

Above you can see how Luoyang Glass’ current ROCE compares to its previous returns on capital, but there isn’t much you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Luoyang Glass.

What can we say about the ROCE trend of Luoyang Glass?

The fact that Luoyang Glass is now generating pre-tax profits on its previous investments is very encouraging. About five years ago the company was making losses, but things have changed as it now earns 16% on its equity. In addition to this, Luoyang Glass employs 1,096% more capital than before, which is expected of a company trying to achieve profitability. This may tell us that the company has many reinvestment opportunities capable of generating higher returns.

One more thing to note, Luoyang Glass reduced current liabilities to 44% of total assets during this period, effectively reducing the amount of financing from suppliers or short-term creditors. So this improvement in ROCE came from the underlying economics of the business, which is great to see. Nonetheless, there are some potential risks the business bears with such high short-term liabilities, so keep that in mind.

The bottom line

In summary, it’s great to see that Luoyang Glass has managed to become profitable and continues to reinvest in his business. And as the stock has performed exceptionally well over the past five years, these trends are being taken into account by investors. So, given that the stock has proven to have some promising trends, it’s worth doing more research on the company to see if these trends are likely to continue.

On a final note, we found 3 warning signs for Luoyang glass (1 is significant) you must be aware.

Although Luoyang Glass does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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