Shandong Taihe Technologies (SZSE:300801) Will Want To Turn Around Its Return Trends

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shandong Taihe Technologies (SZSE:300801) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shandong Taihe Technologies, this is the formula:

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

0.061 = CN¥156m ÷ (CN¥3.1b - CN¥550m) (Based on the trailing twelve months to March 2024).

So, Shandong Taihe Technologies has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

Check out our latest analysis for Shandong Taihe Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shandong Taihe Technologies.

What Can We Tell From Shandong Taihe Technologies' ROCE Trend?

When we looked at the ROCE trend at Shandong Taihe Technologies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.1% from 28% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Shandong Taihe Technologies' ROCE

We're a bit apprehensive about Shandong Taihe Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shandong Taihe Technologies does have some risks though, and we've spotted 2 warning signs for Shandong Taihe Technologies that you might be interested in.

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.