Jiangsu SOPO Chemical (SHSE:600746) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Jiangsu SOPO Chemical (SHSE:600746) so let's look a bit deeper.

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What Is 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. To calculate this metric for Jiangsu SOPO Chemical, this is the formula:

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

0.084 = CN¥457m ÷ (CN¥6.6b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Jiangsu SOPO Chemical has an ROCE of 8.4%. 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 Jiangsu SOPO Chemical

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu SOPO Chemical.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Jiangsu SOPO Chemical is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.4% on its capital. In addition to that, Jiangsu SOPO Chemical is employing 941% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Jiangsu SOPO Chemical's ROCE

In summary, it's great to see that Jiangsu SOPO Chemical has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Jiangsu SOPO Chemical looks impressive, no company is worth an infinite price. The intrinsic value infographic for 600746 helps visualize whether it is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.