Liuzhou Chemical Industry (SHSE:600423) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Liuzhou Chemical Industry's (SHSE:600423) returns on capital, so let's have a look.

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

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. Analysts use this formula to calculate it for Liuzhou Chemical Industry:

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

0.061 = CN¥34m ÷ (CN¥583m - CN¥28m) (Based on the trailing twelve months to September 2024).

Thus, Liuzhou Chemical Industry has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

See our latest analysis for Liuzhou Chemical Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liuzhou Chemical Industry's ROCE against it's prior returns. If you're interested in investigating Liuzhou Chemical Industry's past further, check out this free graph covering Liuzhou Chemical Industry's past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Liuzhou Chemical Industry is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 69%. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

In summary, it's great to see that Liuzhou Chemical Industry has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Liuzhou Chemical Industry that you might find interesting.

While Liuzhou Chemical Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.