Returns Are Gaining Momentum At Lianhe Chemical TechnologyLtd (SZSE:002250)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Lianhe Chemical TechnologyLtd (SZSE:002250) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Lianhe Chemical TechnologyLtd:

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

0.054 = CN¥540m ÷ (CN¥15b - CN¥4.6b) (Based on the trailing twelve months to June 2023).

So, Lianhe Chemical TechnologyLtd has an ROCE of 5.4%. On its own, that's a low figure but it's around the 5.7% average generated by the Chemicals industry.

Check out our latest analysis for Lianhe Chemical TechnologyLtd

Above you can see how the current ROCE for Lianhe Chemical TechnologyLtd 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 Lianhe Chemical TechnologyLtd .

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.4%. 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 76%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Lianhe Chemical TechnologyLtd's ROCE

To sum it up, Lianhe Chemical TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 3 warning signs for Lianhe Chemical TechnologyLtd that we think you should be aware of.

While Lianhe Chemical TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.