There Are Reasons To Feel Uneasy About Zhejiang Sanmei Chemical IndustryLtd's (SHSE:603379) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhejiang Sanmei Chemical IndustryLtd (SHSE:603379) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Zhejiang Sanmei Chemical IndustryLtd:

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

0.10 = CN¥662m ÷ (CN¥7.0b - CN¥634m) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Sanmei Chemical IndustryLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

View our latest analysis for Zhejiang Sanmei Chemical IndustryLtd

In the above chart we have measured Zhejiang Sanmei Chemical IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Sanmei Chemical IndustryLtd for free.

What The Trend Of ROCE Can Tell Us

In terms of Zhejiang Sanmei Chemical IndustryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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

In summary, Zhejiang Sanmei Chemical IndustryLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 55% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Zhejiang Sanmei Chemical IndustryLtd does have some risks though, and we've spotted 1 warning sign for Zhejiang Sanmei Chemical IndustryLtd that you might be interested in.

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.