Some Investors May Be Worried About Sichuan Qiaoyuan GasLtd's (SZSE:301286) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Sichuan Qiaoyuan GasLtd (SZSE:301286) and its ROCE trend, we weren't exactly thrilled.

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 Sichuan Qiaoyuan GasLtd is:

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

0.12 = CN¥219m ÷ (CN¥1.9b - CN¥123m) (Based on the trailing twelve months to June 2024).

Therefore, Sichuan Qiaoyuan GasLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

See our latest analysis for Sichuan Qiaoyuan GasLtd

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're interested in investigating Sichuan Qiaoyuan GasLtd's past further, check out this free graph covering Sichuan Qiaoyuan GasLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sichuan Qiaoyuan GasLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 40%, but since then they've fallen to 12%. 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.

On a side note, Sichuan Qiaoyuan GasLtd has done well to pay down its current liabilities to 6.3% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, Sichuan Qiaoyuan GasLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 15% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with Sichuan Qiaoyuan GasLtd and understanding it should be part of your investment process.

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.