Chengzhi (SZSE:000990) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Chengzhi (SZSE:000990) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Chengzhi is:

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

0.039 = CN¥826m ÷ (CN¥27b - CN¥5.4b) (Based on the trailing twelve months to September 2024).

Thus, Chengzhi has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

See our latest analysis for Chengzhi

In the above chart we have measured Chengzhi's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Chengzhi .

What Does the ROCE Trend For Chengzhi Tell Us?

There hasn't been much to report for Chengzhi's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Chengzhi in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

In summary, Chengzhi isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Chengzhi has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Chengzhi and understanding them should be part of your investment process.

While Chengzhi 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.