Shandong Hualu-Hengsheng Chemical (SHSE:600426) May Have Issues Allocating Its Capital

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. 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)

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. The formula for this calculation on Shandong Hualu-Hengsheng Chemical is:

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).

So, 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 5.6% it's much better.

Check out 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'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. Around five years ago the returns on capital were 19%, but since then they've fallen to 13%. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shandong Hualu-Hengsheng Chemical is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 110% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Shandong Hualu-Hengsheng Chemical that we think you should be aware of.

While Shandong Hualu-Hengsheng Chemical 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.