Be Wary Of Shaanxi Beiyuan Chemical Industry Group (SHSE:601568) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shaanxi Beiyuan Chemical Industry Group (SHSE:601568) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shaanxi Beiyuan Chemical Industry Group, this is the formula:

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

0.044 = CN¥570m ÷ (CN¥16b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Therefore, Shaanxi Beiyuan Chemical Industry Group has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

See our latest analysis for Shaanxi Beiyuan Chemical Industry Group

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'd like to look at how Shaanxi Beiyuan Chemical Industry Group has performed in the past in other metrics, you can view this free graph of Shaanxi Beiyuan Chemical Industry Group's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Shaanxi Beiyuan Chemical Industry Group, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 4.4%. However it looks like Shaanxi Beiyuan Chemical Industry Group 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shaanxi Beiyuan Chemical Industry Group has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shaanxi Beiyuan Chemical Industry Group's ROCE

In summary, Shaanxi Beiyuan Chemical Industry Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Shaanxi Beiyuan Chemical Industry Group we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Shaanxi Beiyuan Chemical Industry Group 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.