Shandong Sinocera Functional Material (SZSE:300285) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shandong Sinocera Functional Material (SZSE:300285) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Shandong Sinocera Functional Material:

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

0.092 = CN¥691m ÷ (CN¥8.9b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shandong Sinocera Functional Material has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

See our latest analysis for Shandong Sinocera Functional Material

Above you can see how the current ROCE for Shandong Sinocera Functional Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shandong Sinocera Functional Material for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Shandong Sinocera Functional Material doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Shandong Sinocera Functional Material's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shandong Sinocera Functional Material is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 15% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Shandong Sinocera Functional Material it's worth checking out our FREE intrinsic value approximation for 300285 to see if it's trading at an attractive price in other respects.

While Shandong Sinocera Functional Material 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.