Capital Allocation Trends At Shandong Hualu-Hengsheng Chemical (SHSE:600426) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shandong Hualu-Hengsheng Chemical (SHSE:600426) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Shandong Hualu-Hengsheng Chemical:

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

0.13 = CN¥5.3b ÷ (CN¥47b - CN¥5.7b) (Based on the trailing twelve months to September 2024).

Thus, Shandong Hualu-Hengsheng Chemical has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Chemicals industry.

View our latest analysis for Shandong Hualu-Hengsheng Chemical

Above you can see how the current ROCE for Shandong Hualu-Hengsheng Chemical 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 Shandong Hualu-Hengsheng Chemical .

How Are Returns Trending?

In terms of Shandong Hualu-Hengsheng Chemical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Shandong Hualu-Hengsheng Chemical in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 85% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Shandong Hualu-Hengsheng Chemical does have some risks though, and we've spotted 1 warning sign for Shandong Hualu-Hengsheng Chemical that you might be interested in.

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.