There's Been No Shortage Of Growth Recently For Shanghai Kinlita Chemical's (SZSE:300225) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Shanghai Kinlita Chemical's (SZSE:300225) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shanghai Kinlita Chemical:

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

0.027 = CN¥23m ÷ (CN¥1.3b - CN¥421m) (Based on the trailing twelve months to March 2024).

So, Shanghai Kinlita Chemical has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Shanghai Kinlita Chemical

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

The Trend Of ROCE

Shareholders will be relieved that Shanghai Kinlita Chemical has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.7%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

To bring it all together, Shanghai Kinlita Chemical has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 6.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Shanghai Kinlita Chemical we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Shanghai Kinlita Chemical 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com