Investors Met With Slowing Returns on Capital At Shanxi Lanhua Sci-Tech VentureLtd (SHSE:600123)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Shanxi Lanhua Sci-Tech VentureLtd (SHSE:600123) looks decent, right now, so lets see what the trend of returns can tell us.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shanxi Lanhua Sci-Tech VentureLtd:

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

0.12 = CN¥2.6b ÷ (CN¥32b - CN¥9.5b) (Based on the trailing twelve months to March 2024).

So, Shanxi Lanhua Sci-Tech VentureLtd has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 11%.

View our latest analysis for Shanxi Lanhua Sci-Tech VentureLtd

Above you can see how the current ROCE for Shanxi Lanhua Sci-Tech VentureLtd 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 Shanxi Lanhua Sci-Tech VentureLtd for free.

What Can We Tell From Shanxi Lanhua Sci-Tech VentureLtd's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 59% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Shanxi Lanhua Sci-Tech VentureLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 30% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

The main thing to remember is that Shanxi Lanhua Sci-Tech VentureLtd has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 133% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Shanxi Lanhua Sci-Tech VentureLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.