Shanghai Chlor-Alkali Chemical (SHSE:600618) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shanghai Chlor-Alkali Chemical (SHSE:600618) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shanghai Chlor-Alkali Chemical is:

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

0.09 = CN¥756m ÷ (CN¥10b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

So, Shanghai Chlor-Alkali Chemical has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.

Check out our latest analysis for Shanghai Chlor-Alkali Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Chlor-Alkali Chemical's ROCE against it's prior returns. If you'd like to look at how Shanghai Chlor-Alkali Chemical has performed in the past in other metrics, you can view this free graph of Shanghai Chlor-Alkali Chemical's past earnings, revenue and cash flow.

So How Is Shanghai Chlor-Alkali Chemical's ROCE Trending?

When we looked at the ROCE trend at Shanghai Chlor-Alkali Chemical, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 9.0%. 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.

Our Take On Shanghai Chlor-Alkali Chemical's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai Chlor-Alkali Chemical is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 4.8% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Shanghai Chlor-Alkali Chemical that you might find interesting.

While Shanghai Chlor-Alkali 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.

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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.