Here's What To Make Of China Shuifa Singyes New Materials Holdings' (HKG:8073) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at China Shuifa Singyes New Materials Holdings (HKG:8073) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for China Shuifa Singyes New Materials Holdings:

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

0.065 = CN¥12m ÷ (CN¥257m - CN¥81m) (Based on the trailing twelve months to December 2024).

So, China Shuifa Singyes New Materials Holdings has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.9%.

View our latest analysis for China Shuifa Singyes New Materials Holdings

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

What Does the ROCE Trend For China Shuifa Singyes New Materials Holdings Tell Us?

We're a bit concerned with the trends, because the business is applying 33% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 6.5%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 31% of total assets, this reported ROCE would probably be less than6.5% because total capital employed would be higher.The 6.5% ROCE could be even lower if current liabilities weren't 31% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From China Shuifa Singyes New Materials Holdings' ROCE

In summary, China Shuifa Singyes New Materials Holdings isn't reinvesting funds back into the business and returns aren't growing. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

China Shuifa Singyes New Materials Holdings does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While China Shuifa Singyes New Materials Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.