Yuanli Chemical GroupLtd (SHSE:603217) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Yuanli Chemical GroupLtd (SHSE:603217) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Yuanli Chemical GroupLtd:

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

0.063 = CN¥201m ÷ (CN¥3.9b - CN¥671m) (Based on the trailing twelve months to June 2024).

Thus, Yuanli Chemical GroupLtd has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

See our latest analysis for Yuanli Chemical GroupLtd

Above you can see how the current ROCE for Yuanli Chemical GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yuanli Chemical GroupLtd for free.

What Can We Tell From Yuanli Chemical GroupLtd's ROCE Trend?

On the surface, the trend of ROCE at Yuanli Chemical GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Yuanli Chemical GroupLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Yuanli Chemical GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five 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.

One final note, you should learn about the 2 warning signs we've spotted with Yuanli Chemical GroupLtd (including 1 which is potentially serious) .

While Yuanli Chemical GroupLtd 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.