Returns On Capital At Henan Jinyuan Hydrogenated Chemicals (HKG:2502) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Henan Jinyuan Hydrogenated Chemicals (HKG:2502) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Return On Capital Employed (ROCE): What Is It?

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 Henan Jinyuan Hydrogenated Chemicals:

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

0.043 = CN¥55m ÷ (CN¥1.7b - CN¥418m) (Based on the trailing twelve months to June 2024).

Thus, Henan Jinyuan Hydrogenated Chemicals has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for Henan Jinyuan Hydrogenated Chemicals

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're interested in investigating Henan Jinyuan Hydrogenated Chemicals' past further, check out this free graph covering Henan Jinyuan Hydrogenated Chemicals' past earnings, revenue and cash flow.

What Does the ROCE Trend For Henan Jinyuan Hydrogenated Chemicals Tell Us?

In terms of Henan Jinyuan Hydrogenated Chemicals' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last three years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Henan Jinyuan Hydrogenated Chemicals has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Henan Jinyuan Hydrogenated Chemicals' ROCE

While returns have fallen for Henan Jinyuan Hydrogenated Chemicals in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Henan Jinyuan Hydrogenated Chemicals does come with some risks, and we've found 3 warning signs that you should be aware of.

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.