Returns At Dongguang Chemical (HKG:1702) Appear To Be Weighed Down

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over Dongguang Chemical's (HKG:1702) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Dongguang Chemical:

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

0.20 = CN¥290m ÷ (CN¥2.1b - CN¥634m) (Based on the trailing twelve months to June 2021).

So, Dongguang Chemical has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

See our latest analysis for Dongguang Chemical

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

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 20%. 20% is a pretty standard return, and it provides some comfort knowing that Dongguang Chemical has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Dongguang Chemical has done well to reduce current liabilities to 30% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Dongguang Chemical's ROCE

In the end, Dongguang Chemical has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 22% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we've found 2 warning signs for Dongguang Chemical that we think you should be aware of.

While Dongguang Chemical 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.
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