Be Wary Of Shanxi Yongdong Chemistry Industry (SZSE:002753) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Shanxi Yongdong Chemistry Industry (SZSE:002753) 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)

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 Shanxi Yongdong Chemistry Industry:

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

0.068 = CN¥193m ÷ (CN¥3.2b - CN¥367m) (Based on the trailing twelve months to June 2024).

Therefore, Shanxi Yongdong Chemistry Industry has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Shanxi Yongdong Chemistry Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanxi Yongdong Chemistry Industry's ROCE against it's prior returns. If you're interested in investigating Shanxi Yongdong Chemistry Industry's past further, check out this free graph covering Shanxi Yongdong Chemistry Industry's past earnings, revenue and cash flow.

What Can We Tell From Shanxi Yongdong Chemistry Industry's ROCE Trend?

In terms of Shanxi Yongdong Chemistry Industry's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Shanxi Yongdong Chemistry Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One final note, you should learn about the 2 warning signs we've spotted with Shanxi Yongdong Chemistry Industry (including 1 which is potentially serious) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.