Shanghai Chicmax Cosmetic (HKG:2145) Is Very Good At Capital Allocation

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Shanghai Chicmax Cosmetic's (HKG:2145) look very promising so lets take a look.

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. To calculate this metric for Shanghai Chicmax Cosmetic, this is the formula:

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

0.20 = CN¥425m ÷ (CN¥3.1b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

So, Shanghai Chicmax Cosmetic has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 12%.

Check out our latest analysis for Shanghai Chicmax Cosmetic

In the above chart we have measured Shanghai Chicmax Cosmetic'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 Shanghai Chicmax Cosmetic .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Shanghai Chicmax Cosmetic are quite reassuring. The data shows that returns on capital have increased substantially over the last four years to 20%. The amount of capital employed has increased too, by 1,996%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shanghai Chicmax Cosmetic has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To sum it up, Shanghai Chicmax Cosmetic has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 2145 that compares the share price and estimated value.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.