Shandong Rike ChemicalLTD (SZSE:300214) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shandong Rike ChemicalLTD (SZSE:300214) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.038 = CN¥115m ÷ (CN¥3.6b - CN¥536m) (Based on the trailing twelve months to September 2023).

Therefore, Shandong Rike ChemicalLTD has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Shandong Rike ChemicalLTD

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 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.

So How Is Shandong Rike ChemicalLTD's ROCE Trending?

On the surface, the trend of ROCE at Shandong Rike ChemicalLTD doesn't inspire confidence. Around five years ago the returns on capital were 5.3%, but since then they've fallen to 3.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Shandong Rike ChemicalLTD have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Shandong Rike ChemicalLTD we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Shandong Rike ChemicalLTD 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.