Changmao Biochemical Engineering (HKG:954) Will Be Looking To Turn Around Its Returns

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Changmao Biochemical Engineering (HKG:954), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Changmao Biochemical Engineering is:

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

0.032 = CN¥21m ÷ (CN¥847m - CN¥196m) (Based on the trailing twelve months to December 2020).

Thus, Changmao Biochemical Engineering has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.7%.

See our latest analysis for Changmao Biochemical Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changmao Biochemical Engineering's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Changmao Biochemical Engineering, check out these free graphs here.

What Can We Tell From Changmao Biochemical Engineering's ROCE Trend?

There is reason to be cautious about Changmao Biochemical Engineering, given the returns are trending downwards. About five years ago, returns on capital were 7.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Changmao Biochemical Engineering to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Changmao Biochemical Engineering you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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