Zhejiang Sanmei Chemical IndustryLtd (SHSE:603379) Will Want To Turn Around Its Return Trends

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Zhejiang Sanmei Chemical IndustryLtd (SHSE:603379), it didn't seem to tick all of these boxes.

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 Zhejiang Sanmei Chemical IndustryLtd, this is the formula:

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

0.076 = CN¥470m ÷ (CN¥6.8b - CN¥656m) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Sanmei Chemical IndustryLtd has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

View our latest analysis for Zhejiang Sanmei Chemical IndustryLtd

Above you can see how the current ROCE for Zhejiang Sanmei Chemical IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Sanmei Chemical IndustryLtd .

The Trend Of ROCE

In terms of Zhejiang Sanmei Chemical IndustryLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 7.6%. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Zhejiang Sanmei Chemical IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Sanmei Chemical IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang Sanmei Chemical IndustryLtd (including 1 which is concerning) .

While Zhejiang Sanmei Chemical IndustryLtd 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.