Shandong Taihe Technologies (SZSE:300801) May Have Issues Allocating Its Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Shandong Taihe Technologies (SZSE:300801), we don't think it's current trends fit the mold of a multi-bagger.

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 Taihe Technologies is:

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

0.063 = CN¥156m ÷ (CN¥3.2b - CN¥664m) (Based on the trailing twelve months to June 2024).

Thus, Shandong Taihe Technologies has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

See our latest analysis for Shandong Taihe Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Taihe Technologies' ROCE against it's prior returns. If you're interested in investigating Shandong Taihe Technologies' past further, check out this free graph covering Shandong Taihe Technologies' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Shandong Taihe Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 6.3%. However it looks like Shandong Taihe Technologies 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Shandong Taihe Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by Shandong Taihe Technologies' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Shandong Taihe Technologies and understanding these should be part of your investment process.

While Shandong Taihe Technologies 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.