Returns On Capital Signal Tricky Times Ahead For Chengdu Shengbang SealsLtd (SZSE:301233)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Chengdu Shengbang SealsLtd (SZSE:301233), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Chengdu Shengbang SealsLtd is:

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

0.085 = CN¥74m ÷ (CN¥983m - CN¥119m) (Based on the trailing twelve months to December 2023).

So, Chengdu Shengbang SealsLtd has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.7%.

See our latest analysis for Chengdu Shengbang SealsLtd

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 Chengdu Shengbang SealsLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Chengdu Shengbang SealsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.5% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Chengdu Shengbang SealsLtd has decreased its current liabilities to 12% 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.

Our Take On Chengdu Shengbang SealsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chengdu Shengbang SealsLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 22% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Chengdu Shengbang SealsLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Chengdu Shengbang SealsLtd 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.