Yangzhou Chenhua New Material's (SZSE:300610) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Yangzhou Chenhua New Material (SZSE:300610), it didn't seem to tick all of these boxes.

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 Yangzhou Chenhua New Material:

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

0.034 = CN¥42m ÷ (CN¥1.5b - CN¥291m) (Based on the trailing twelve months to June 2024).

So, Yangzhou Chenhua New Material has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for Yangzhou Chenhua New Material

In the above chart we have measured Yangzhou Chenhua New Material's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yangzhou Chenhua New Material .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Yangzhou Chenhua New Material, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.4% from 11% five years ago. However it looks like Yangzhou Chenhua New Material might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Yangzhou Chenhua New Material's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Yangzhou Chenhua New Material does have some risks though, and we've spotted 1 warning sign for Yangzhou Chenhua New Material that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.