Investors Shouldn't Overlook China Shanshui Cement Group's (HKG:691) Impressive Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of China Shanshui Cement Group (HKG:691) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Shanshui Cement Group:

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

0.30 = CN¥5.4b ÷ (CN¥28b - CN¥9.8b) (Based on the trailing twelve months to December 2020).

So, China Shanshui Cement Group has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 15%.

View 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're interested in investigating China Shanshui Cement Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Shanshui Cement Group's ROCE Trend?

The fact that China Shanshui Cement Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 30% on its capital. In addition to that, China Shanshui Cement Group is employing 239% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that China Shanshui Cement Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On China Shanshui Cement Group's ROCE

Long story short, we're delighted to see that China Shanshui Cement Group's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 1.0% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

China Shanshui Cement Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.