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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Sanjiang Fine Chemicals' (HKG:2198) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for China Sanjiang Fine Chemicals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥1.0b ÷ (CN¥13b - CN¥6.0b) (Based on the trailing twelve months to June 2021).
Thus, China Sanjiang Fine Chemicals has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Sanjiang Fine Chemicals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From China Sanjiang Fine Chemicals' ROCE Trend?
We're delighted to see that China Sanjiang Fine Chemicals is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. In addition to that, China Sanjiang Fine Chemicals is employing 79% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, China Sanjiang Fine Chemicals has decreased current liabilities to 48% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Bottom Line
To the delight of most shareholders, China Sanjiang Fine Chemicals has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. In light of that, we think it's worth looking further into this stock because if China Sanjiang Fine Chemicals can keep these trends up, it could have a bright future ahead.
If you want to continue researching China Sanjiang Fine Chemicals, you might be interested to know about the 2 warning signs that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.