Here's What To Make Of Tangshan Sanyou Chemical IndustriesLtd's (SHSE:600409) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Tangshan Sanyou Chemical IndustriesLtd (SHSE:600409), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tangshan Sanyou Chemical IndustriesLtd, this is the formula:

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

0.083 = CN¥1.7b ÷ (CN¥26b - CN¥5.8b) (Based on the trailing twelve months to June 2024).

Therefore, Tangshan Sanyou Chemical IndustriesLtd has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

See our latest analysis for Tangshan Sanyou Chemical IndustriesLtd

In the above chart we have measured Tangshan Sanyou Chemical IndustriesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tangshan Sanyou Chemical IndustriesLtd for free.

How Are Returns Trending?

There hasn't been much to report for Tangshan Sanyou Chemical IndustriesLtd's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Tangshan Sanyou Chemical IndustriesLtd doesn't end up being a multi-bagger in a few years time.

On a side note, Tangshan Sanyou Chemical IndustriesLtd has done well to reduce current liabilities to 22% of total assets over the last five years. 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.

The Key Takeaway

We can conclude that in regards to Tangshan Sanyou Chemical IndustriesLtd's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Tangshan Sanyou Chemical IndustriesLtd that we think you should be aware of.

While Tangshan Sanyou Chemical IndustriesLtd 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.