Be Wary Of Shandong Hualu-Hengsheng Chemical (SHSE:600426) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shandong Hualu-Hengsheng Chemical (SHSE:600426) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Shandong Hualu-Hengsheng Chemical:

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

0.13 = CN¥5.0b ÷ (CN¥45b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Therefore, Shandong Hualu-Hengsheng Chemical has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

See our latest analysis for Shandong Hualu-Hengsheng Chemical

In the above chart we have measured Shandong Hualu-Hengsheng Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shandong Hualu-Hengsheng Chemical .

So How Is Shandong Hualu-Hengsheng Chemical's ROCE Trending?

When we looked at the ROCE trend at Shandong Hualu-Hengsheng Chemical, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 24% five years ago. However it looks like Shandong Hualu-Hengsheng Chemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Shandong Hualu-Hengsheng Chemical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 110% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Shandong Hualu-Hengsheng Chemical (including 1 which can't be ignored) .

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

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.