Investors Met With Slowing Returns on Capital At China Shuifa Singyes New Materials Holdings (HKG:8073)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 China Shuifa Singyes New Materials Holdings (HKG:8073) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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. To calculate this metric for China Shuifa Singyes New Materials Holdings, this is the formula:

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%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

See 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're interested in investigating China Shuifa Singyes New Materials Holdings' past further, check out this free graph covering China Shuifa Singyes New Materials Holdings' past earnings, revenue and cash flow.

What Can We Tell From China Shuifa Singyes New Materials Holdings' ROCE Trend?

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. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

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.

Our Take On China Shuifa Singyes New Materials Holdings' ROCE

Overall, we're not ecstatic to see China Shuifa Singyes New Materials Holdings reducing the amount of capital it employs in the business. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. 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.

On a final note, we've found 1 warning sign for China Shuifa Singyes New Materials Holdings that we think you should be aware of.

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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.