Capital Allocation Trends At Liaoning Dingjide Petrochemical (SHSE:603255) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Liaoning Dingjide Petrochemical (SHSE:603255), it didn't seem to tick all of these boxes.

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

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 Liaoning Dingjide Petrochemical:

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

0.0084 = CN¥18m ÷ (CN¥3.0b - CN¥825m) (Based on the trailing twelve months to September 2024).

Thus, Liaoning Dingjide Petrochemical has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

Check out our latest analysis for Liaoning Dingjide Petrochemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Dingjide Petrochemical's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Liaoning Dingjide Petrochemical.

What Does the ROCE Trend For Liaoning Dingjide Petrochemical Tell Us?

On the surface, the trend of ROCE at Liaoning Dingjide Petrochemical doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Liaoning Dingjide Petrochemical's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 10% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Liaoning Dingjide Petrochemical does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

While Liaoning Dingjide Petrochemical 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.