The Returns On Capital At Shanghai Chicmax Cosmetic (HKG:2145) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Shanghai Chicmax Cosmetic (HKG:2145) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai Chicmax Cosmetic:

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

0.054 = CN¥98m ÷ (CN¥2.8b - CN¥1.0b) (Based on the trailing twelve months to June 2023).

So, Shanghai Chicmax Cosmetic has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 10%.

Check out our latest analysis for Shanghai Chicmax Cosmetic

Above you can see how the current ROCE for Shanghai Chicmax Cosmetic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Chicmax Cosmetic.

What The Trend Of ROCE Can Tell Us

In terms of Shanghai Chicmax Cosmetic's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last three years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shanghai Chicmax Cosmetic has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Shanghai Chicmax Cosmetic's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Chicmax Cosmetic's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 2.5% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you're still interested in Shanghai Chicmax Cosmetic it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.