Here's What's Concerning About Sichuan Lutianhua Company Limited By Shares' (SZSE:000912) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sichuan Lutianhua Company Limited By Shares (SZSE:000912) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Sichuan Lutianhua Company Limited By Shares is:

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

0.032 = CN¥229m ÷ (CN¥10b - CN¥3.2b) (Based on the trailing twelve months to September 2023).

So, Sichuan Lutianhua Company Limited By Shares has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.9%.

See our latest analysis for Sichuan Lutianhua Company Limited By Shares

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 Sichuan Lutianhua Company Limited By Shares' past further, check out this free graph covering Sichuan Lutianhua Company Limited By Shares' past earnings, revenue and cash flow.

What Can We Tell From Sichuan Lutianhua Company Limited By Shares' ROCE Trend?

On the surface, the trend of ROCE at Sichuan Lutianhua Company Limited By Shares doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.2%. However it looks like Sichuan Lutianhua Company Limited By Shares might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Sichuan Lutianhua Company Limited By Shares has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Sichuan Lutianhua Company Limited By Shares' ROCE

To conclude, we've found that Sichuan Lutianhua Company Limited By Shares is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. Therefore based on the analysis done in this article, we don't think Sichuan Lutianhua Company Limited By Shares has the makings of a multi-bagger.

If you're still interested in Sichuan Lutianhua Company Limited By Shares it's worth checking out our FREE intrinsic value approximation for 000912 to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.