Shandong Weifang Rainbow Chemical (SZSE:301035) Hasn't Managed To Accelerate Its Returns

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Shandong Weifang Rainbow Chemical's (SZSE:301035) trend of ROCE, we liked what we saw.

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

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. The formula for this calculation on Shandong Weifang Rainbow Chemical is:

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

0.15 = CN¥1.1b ÷ (CN¥16b - CN¥8.7b) (Based on the trailing twelve months to September 2024).

Therefore, Shandong Weifang Rainbow Chemical has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

View our latest analysis for Shandong Weifang Rainbow Chemical

In the above chart we have measured Shandong Weifang Rainbow Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shandong Weifang Rainbow Chemical .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 192% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Shandong Weifang Rainbow Chemical has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Shandong Weifang Rainbow Chemical has a high ratio of current liabilities to total assets of 55%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Shandong Weifang Rainbow Chemical's ROCE

In the end, Shandong Weifang Rainbow Chemical has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 24% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing: We've identified 3 warning signs with Shandong Weifang Rainbow Chemical (at least 1 which is significant) , and understanding them would certainly be useful.

While Shandong Weifang Rainbow Chemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.