The Returns At Tsaker Chemical Group (HKG:1986) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Tsaker Chemical Group's (HKG:1986) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tsaker Chemical Group, this is the formula:

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

0.13 = CN¥226m ÷ (CN¥2.3b - CN¥598m) (Based on the trailing twelve months to December 2020).

Therefore, Tsaker Chemical Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.5% it's much better.

View our latest analysis for Tsaker Chemical Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tsaker Chemical Group's ROCE against it's prior returns. If you're interested in investigating Tsaker Chemical Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tsaker Chemical Group's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 100% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 26% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In the end, Tsaker Chemical Group has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 19%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you'd like to know about the risks facing Tsaker Chemical Group, we've discovered 2 warning signs that you should be aware of.

While Tsaker Chemical Group 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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