Milkyway Chemical Supply Chain ServiceLtd's (SHSE:603713) Returns Have Hit A Wall

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Milkyway Chemical Supply Chain ServiceLtd (SHSE:603713) looks decent, right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for Milkyway Chemical Supply Chain ServiceLtd:

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

0.11 = CN¥740m ÷ (CN¥11b - CN¥4.7b) (Based on the trailing twelve months to March 2024).

So, Milkyway Chemical Supply Chain ServiceLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 7.1% it's much better.

Check out our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

In the above chart we have measured Milkyway Chemical Supply Chain ServiceLtd's 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 Milkyway Chemical Supply Chain ServiceLtd .

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 348% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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 41% 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 41% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

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

In the end, Milkyway Chemical Supply Chain ServiceLtd has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 88% to shareholders 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.

If you'd like to know more about Milkyway Chemical Supply Chain ServiceLtd, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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.