Returns On Capital Signal Tricky Times Ahead For Chase Science (SZSE:300941)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Chase Science (SZSE:300941) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Chase Science is:

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

0.041 = CN¥52m ÷ (CN¥1.3b - CN¥66m) (Based on the trailing twelve months to September 2023).

Therefore, Chase Science has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

View our latest analysis for Chase Science

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

The Trend Of ROCE

In terms of Chase Science's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 37%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Chase Science has decreased its current liabilities to 5.0% 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. 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

In summary, we're somewhat concerned by Chase Science's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 38% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Chase Science (of which 1 shouldn't be ignored!) that you should know about.

While Chase Science 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.