China Resources Chemical Innovative Materials (SZSE:301090) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Resources Chemical Innovative Materials (SZSE:301090), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for China Resources Chemical Innovative Materials:

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

0.073 = CN¥547m ÷ (CN¥10b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Therefore, China Resources Chemical Innovative Materials has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.7% generated by the Chemicals industry, it's much better.

Check out our latest analysis for China Resources Chemical Innovative Materials

In the above chart we have measured China Resources Chemical Innovative Materials' 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 China Resources Chemical Innovative Materials .

So How Is China Resources Chemical Innovative Materials' ROCE Trending?

In terms of China Resources Chemical Innovative Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like China Resources Chemical Innovative Materials 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.

On a side note, China Resources Chemical Innovative Materials has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that China Resources Chemical Innovative Materials is reinvesting in the business, but returns have been falling. Since the stock has declined 11% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Resources Chemical Innovative Materials has the makings of a multi-bagger.

Like most companies, China Resources Chemical Innovative Materials does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Resources Chemical Innovative Materials 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.