SANVO Fine Chemicals Group (HKG:301) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. The formula for this calculation on SANVO Fine Chemicals Group is:

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

0.061 = CN¥20m ÷ (CN¥785m - CN¥459m) (Based on the trailing twelve months to June 2023).

So, SANVO Fine Chemicals Group has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.3%.

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 Does the ROCE Trend For SANVO Fine Chemicals Group Tell Us?

In terms of SANVO Fine Chemicals Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.1% from 30% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, SANVO Fine Chemicals Group has decreased its current liabilities to 58% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On SANVO Fine Chemicals Group's ROCE

Bringing it all together, while we're somewhat encouraged by SANVO Fine Chemicals Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 4.9% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about SANVO Fine Chemicals Group, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While SANVO Fine Chemicals Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.