Returns On Capital At Guangdong Skychem Technology (SHSE:688603) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Guangdong Skychem Technology (SHSE:688603), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Guangdong Skychem Technology, this is the formula:

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

0.079 = CN¥89m ÷ (CN¥1.2b - CN¥52m) (Based on the trailing twelve months to December 2024).

Thus, Guangdong Skychem Technology has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.

See our latest analysis for Guangdong Skychem Technology

Above you can see how the current ROCE for Guangdong Skychem Technology 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 Guangdong Skychem Technology for free.

The Trend Of ROCE

When we looked at the ROCE trend at Guangdong Skychem Technology, we didn't gain much confidence. Around three years ago the returns on capital were 20%, but since then they've fallen to 7.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Skychem Technology is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 117% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

While Guangdong Skychem Technology doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 688603 on our platform.

While Guangdong Skychem Technology 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.