Investors Could Be Concerned With SANVO Fine Chemicals Group's (HKG:301) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think SANVO Fine Chemicals Group (HKG:301) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 SANVO Fine Chemicals Group, this is the formula:

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

0.034 = CN¥11m ÷ (CN¥789m - CN¥468m) (Based on the trailing twelve months to December 2022).

Therefore, SANVO Fine Chemicals Group has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

See our latest analysis for SANVO Fine Chemicals Group

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

What The Trend Of ROCE Can Tell Us

In terms of SANVO Fine Chemicals Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like SANVO Fine Chemicals Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, SANVO Fine Chemicals Group's current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From SANVO Fine Chemicals Group's ROCE

To conclude, we've found that SANVO Fine Chemicals Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 39% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for SANVO Fine Chemicals Group (of which 2 are a bit concerning!) that you should know about.

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.