Investors Will Want Changmao Biochemical Engineering's (HKG:954) Growth In ROCE To Persist

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Changmao Biochemical Engineering (HKG:954) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Changmao Biochemical Engineering is:

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

0.094 = CN¥87m ÷ (CN¥1.2b - CN¥274m) (Based on the trailing twelve months to December 2022).

So, Changmao Biochemical Engineering has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

See our latest analysis for Changmao Biochemical Engineering

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Changmao Biochemical Engineering, check out these free graphs here.

So How Is Changmao Biochemical Engineering's ROCE Trending?

Changmao Biochemical Engineering has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.4% on its capital. Not only that, but the company is utilizing 60% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

In summary, it's great to see that Changmao Biochemical Engineering has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 23% to shareholders. So with that in mind, we think the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Changmao Biochemical Engineering (of which 1 makes us a bit uncomfortable!) that you should 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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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.