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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Yuanli Chemical GroupLtd (SHSE:603217), it didn't seem to tick all of these boxes.

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Understanding 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. 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)

0.06 = CN¥196m ÷ (CN¥4.0b - CN¥718m) (Based on the trailing twelve months to September 2024).

So, Yuanli Chemical GroupLtd has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

View our latest analysis for Yuanli Chemical GroupLtd

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're interested in investigating Yuanli Chemical GroupLtd's past further, check out this free graph covering Yuanli Chemical GroupLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Yuanli Chemical GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 6.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Bottom Line On Yuanli Chemical GroupLtd's ROCE

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. Unsurprisingly, the stock has only gained 17% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Yuanli Chemical GroupLtd, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.