Returns On Capital Signal Tricky Times Ahead For Sichuan Dowell Science and Technology (SZSE:300535)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sichuan Dowell Science and Technology (SZSE:300535) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sichuan Dowell Science and Technology:

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

0.015 = CN¥15m ÷ (CN¥1.4b - CN¥409m) (Based on the trailing twelve months to September 2023).

Therefore, Sichuan Dowell Science and Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

See our latest analysis for Sichuan Dowell Science and Technology

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Sichuan Dowell Science and Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.6% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 29%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Sichuan Dowell Science and Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sichuan Dowell Science and Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Sichuan Dowell Science and Technology we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.