Returns on Capital Paint A Bright Future For Lee & Man Chemical (HKG:746)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Lee & Man Chemical (HKG:746) we really liked what we saw.

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

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. The formula for this calculation on Lee & Man Chemical is:

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

0.31 = HK$1.9b ÷ (HK$7.4b - HK$1.0b) (Based on the trailing twelve months to June 2022).

Therefore, Lee & Man Chemical has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

Check out our latest analysis for Lee & Man Chemical

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

What Can We Tell From Lee & Man Chemical's ROCE Trend?

We like the trends that we're seeing from Lee & Man Chemical. The data shows that returns on capital have increased substantially over the last five years to 31%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 45%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Lee & Man Chemical's ROCE

All in all, it's terrific to see that Lee & Man Chemical is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 35% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Lee & Man Chemical does have some risks though, and we've spotted 2 warning signs for Lee & Man Chemical that you might be interested in.

Lee & Man Chemical 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.

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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.