Milkyway Chemical Supply Chain ServiceLtd (SHSE:603713) Hasn't Managed To Accelerate Its Returns

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Milkyway Chemical Supply Chain ServiceLtd's (SHSE:603713) ROCE trend, we were pretty happy with what we saw.

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

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. To calculate this metric for Milkyway Chemical Supply Chain ServiceLtd, this is the formula:

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

0.11 = CN¥807m ÷ (CN¥13b - CN¥5.4b) (Based on the trailing twelve months to September 2024).

Thus, Milkyway Chemical Supply Chain ServiceLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Logistics industry.

View our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

Above you can see how the current ROCE for Milkyway Chemical Supply Chain ServiceLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Milkyway Chemical Supply Chain ServiceLtd .

What Can We Tell From Milkyway Chemical Supply Chain ServiceLtd's ROCE Trend?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 308% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Milkyway Chemical Supply Chain ServiceLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 43% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Milkyway Chemical Supply Chain ServiceLtd's ROCE

To sum it up, Milkyway Chemical Supply Chain ServiceLtd has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 59% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we found 2 warning signs for Milkyway Chemical Supply Chain ServiceLtd (1 is a bit unpleasant) you should be aware of.

While Milkyway Chemical Supply Chain ServiceLtd 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.