Returns On Capital At Chengzhi (SZSE:000990) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Chengzhi (SZSE:000990) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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 5.4%.

See our latest analysis for Chengzhi

Above you can see how the current ROCE for Chengzhi 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 Chengzhi .

What Does the ROCE Trend For Chengzhi Tell Us?

Over the past five years, Chengzhi's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Chengzhi doesn't end up being a multi-bagger in a few years time.

Our Take On Chengzhi's ROCE

We can conclude that in regards to Chengzhi's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Chengzhi, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.