Be Wary Of China Shanshui Cement Group (HKG:691) And Its 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. In light of that, when we looked at China Shanshui Cement Group (HKG:691) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China Shanshui Cement Group is:

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

0.066 = CN¥1.4b ÷ (CN¥33b - CN¥12b) (Based on the trailing twelve months to June 2023).

Thus, China Shanshui Cement Group has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 3.7%.

Check out our latest analysis for China Shanshui Cement Group

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

So How Is China Shanshui Cement Group's ROCE Trending?

On the surface, the trend of ROCE at China Shanshui Cement Group doesn't inspire confidence. To be more specific, ROCE has fallen from 53% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, China Shanshui Cement Group has decreased its current liabilities to 37% 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.

The Bottom Line On China Shanshui Cement Group's ROCE

We're a bit apprehensive about China Shanshui Cement Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 82% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with China Shanshui Cement Group (including 1 which doesn't sit too well with us) .

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.