Returns On Capital Signal Tricky Times Ahead For Shandong Kaisheng New MaterialsLtd (SZSE:301069)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Shandong Kaisheng New MaterialsLtd (SZSE:301069) 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. Analysts use this formula to calculate it for Shandong Kaisheng New MaterialsLtd:

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

0.041 = CN¥89m ÷ (CN¥2.5b - CN¥297m) (Based on the trailing twelve months to September 2024).

Thus, Shandong Kaisheng New MaterialsLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

See our latest analysis for Shandong Kaisheng New MaterialsLtd

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

What Can We Tell From Shandong Kaisheng New MaterialsLtd's ROCE Trend?

In terms of Shandong Kaisheng New MaterialsLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 4.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Shandong Kaisheng New MaterialsLtd's ROCE

In summary, Shandong Kaisheng New MaterialsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 68% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shandong Kaisheng New MaterialsLtd has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Shandong Kaisheng New MaterialsLtd (including 1 which is a bit unpleasant) .

While Shandong Kaisheng New MaterialsLtd 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.