The Returns On Capital At Shandong Sinocera Functional Material (SZSE:300285) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

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. The formula for this calculation on Shandong Sinocera Functional Material is:

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

0.093 = CN¥711m ÷ (CN¥9.2b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

So, Shandong Sinocera Functional Material has an ROCE of 9.3%. 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

In the above chart we have measured Shandong Sinocera Functional Material's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shandong Sinocera Functional Material for free.

So How Is Shandong Sinocera Functional Material's ROCE Trending?

When we looked at the ROCE trend at Shandong Sinocera Functional Material, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.3%. 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.

The Bottom Line On Shandong Sinocera Functional Material's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shandong Sinocera Functional Material. These growth trends haven't led to growth returns though, since the stock has fallen 29% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Shandong Sinocera Functional Material does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.