Be Wary Of Longxing Chemical Stock (SZSE:002442) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Having said that, from a first glance at Longxing Chemical Stock (SZSE:002442) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Longxing Chemical Stock:

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

0.065 = CN¥199m ÷ (CN¥4.3b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Thus, Longxing Chemical Stock has an ROCE of 6.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

View our latest analysis for Longxing Chemical Stock

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'd like to look at how Longxing Chemical Stock has performed in the past in other metrics, you can view this free graph of Longxing Chemical Stock's past earnings, revenue and cash flow.

What Can We Tell From Longxing Chemical Stock's ROCE Trend?

When we looked at the ROCE trend at Longxing Chemical Stock, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.5% from 8.3% five years ago. However it looks like Longxing Chemical Stock 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Longxing Chemical Stock has decreased its current liabilities to 29% 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.

In Conclusion...

To conclude, we've found that Longxing Chemical Stock is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Longxing Chemical Stock (of which 2 are a bit concerning!) that you should know about.

While Longxing Chemical Stock 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.