Shandong Rike ChemicalLTD (SZSE:300214) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next 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. 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 Shandong Rike ChemicalLTD (SZSE:300214) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shandong Rike ChemicalLTD, this is the formula:

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

0.0024 = CN¥7.5m ÷ (CN¥4.6b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Rike ChemicalLTD has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Shandong Rike ChemicalLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Rike ChemicalLTD's ROCE against it's prior returns. If you'd like to look at how Shandong Rike ChemicalLTD has performed in the past in other metrics, you can view this free graph of Shandong Rike ChemicalLTD's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shandong Rike ChemicalLTD Tell Us?

When we looked at the ROCE trend at Shandong Rike ChemicalLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. However it looks like Shandong Rike ChemicalLTD 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shandong Rike ChemicalLTD's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

To conclude, we've found that Shandong Rike ChemicalLTD is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Shandong Rike ChemicalLTD that we think you should be aware of.

While Shandong Rike ChemicalLTD 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.