Returns On Capital At Changmao Biochemical Engineering (HKG:954) Have Stalled

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Changmao Biochemical Engineering (HKG:954), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Changmao Biochemical Engineering, this is the formula:

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

0.012 = CN¥11m ÷ (CN¥1.1b - CN¥241m) (Based on the trailing twelve months to June 2022).

Therefore, Changmao Biochemical Engineering has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

Our analysis indicates that 954 is potentially undervalued!

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?

There are better returns on capital out there than what we're seeing at Changmao Biochemical Engineering. The company has consistently earned 1.2% for the last five years, and the capital employed within the business has risen 56% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Changmao Biochemical Engineering's ROCE

As we've seen above, Changmao Biochemical Engineering's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 2.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 2 warning signs with Changmao Biochemical Engineering (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Changmao Biochemical Engineering 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.