Here’s What’s Happening With Returns At China Sanjiang Fine Chemicals (HKG:2198)

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at China Sanjiang Fine Chemicals (HKG:2198) so let's look a bit deeper.

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. Analysts use this formula to calculate it for China Sanjiang Fine Chemicals:

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

0.19 = CN¥1.0b ÷ (CN¥13b - CN¥7.3b) (Based on the trailing twelve months to June 2020).

Thus, China Sanjiang Fine Chemicals has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 11% it's much better.

View our latest analysis for China Sanjiang Fine Chemicals

Above you can see how the current ROCE for China Sanjiang Fine Chemicals 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 China Sanjiang Fine Chemicals.

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 has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. While returns have increased, the amount of capital employed by China Sanjiang Fine Chemicals has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, China Sanjiang Fine Chemicals' current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To bring it all together, China Sanjiang Fine Chemicals has done well to increase the returns it's generating from its capital employed. And a remarkable 197% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 3 warning signs facing China Sanjiang Fine Chemicals that you might find interesting.

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This article by Simply Wall St is general in nature. 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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