Investors Met With Slowing Returns on Capital At Shenzhen Capchem Technology (SZSE:300037)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shenzhen Capchem Technology (SZSE:300037), it didn't seem to tick all of these boxes.

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 Shenzhen Capchem Technology:

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

0.089 = CN¥1.1b ÷ (CN¥18b - CN¥5.3b) (Based on the trailing twelve months to December 2023).

Thus, Shenzhen Capchem Technology has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.8%.

See our latest analysis for Shenzhen Capchem Technology

Above you can see how the current ROCE for Shenzhen Capchem Technology 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 Shenzhen Capchem Technology .

What The Trend Of ROCE Can Tell Us

In terms of Shenzhen Capchem Technology's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.9% for the last five years, and the capital employed within the business has risen 294% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Shenzhen Capchem Technology's ROCE

In conclusion, Shenzhen Capchem Technology has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 133% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Shenzhen Capchem Technology does have some risks though, and we've spotted 1 warning sign for Shenzhen Capchem Technology that you might be interested in.

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.