Chengxin Lithium Group (SZSE:002240) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Chengxin Lithium Group (SZSE:002240) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Chengxin Lithium Group:

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

0.15 = CN¥2.3b ÷ (CN¥22b - CN¥6.3b) (Based on the trailing twelve months to September 2023).

Thus, Chengxin Lithium Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.7% it's much better.

Check out our latest analysis for Chengxin Lithium Group

In the above chart we have measured Chengxin Lithium Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengxin Lithium Group .

The Trend Of ROCE

The trends we've noticed at Chengxin Lithium Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 530%. So we're very much inspired by what we're seeing at Chengxin Lithium Group thanks to its ability to profitably reinvest capital.

The Bottom Line On Chengxin Lithium Group's ROCE

To sum it up, Chengxin Lithium Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 121% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Chengxin Lithium Group, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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.