Investors Could Be Concerned With Tangshan Sanyou Chemical IndustriesLtd's (SHSE:600409) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Tangshan Sanyou Chemical IndustriesLtd (SHSE:600409), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tangshan Sanyou Chemical IndustriesLtd is:

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

0.089 = CN¥1.8b ÷ (CN¥26b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Thus, Tangshan Sanyou Chemical IndustriesLtd has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

View our latest analysis for Tangshan Sanyou Chemical IndustriesLtd

Above you can see how the current ROCE for Tangshan Sanyou Chemical IndustriesLtd 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 Tangshan Sanyou Chemical IndustriesLtd .

What Does the ROCE Trend For Tangshan Sanyou Chemical IndustriesLtd Tell Us?

In terms of Tangshan Sanyou Chemical IndustriesLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tangshan Sanyou Chemical IndustriesLtd becoming one if things continue as they have.

On a related note, Tangshan Sanyou Chemical IndustriesLtd has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Tangshan Sanyou Chemical IndustriesLtd's ROCE

In summary, it's unfortunate that Tangshan Sanyou Chemical IndustriesLtd is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 6.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a separate note, we've found 1 warning sign for Tangshan Sanyou Chemical IndustriesLtd you'll probably want to know about.

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.

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.