Should We Be Excited About The Trends Of Returns At Changmao Biochemical Engineering (HKG:954)?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Changmao Biochemical Engineering (HKG:954), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Changmao Biochemical Engineering:

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

0.055 = CN¥36m ÷ (CN¥757m - CN¥107m) (Based on the trailing twelve months to June 2020).

Therefore, Changmao Biochemical Engineering has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 11%.

Check out 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.

What Does the ROCE Trend For Changmao Biochemical Engineering Tell Us?

On the surface, the trend of ROCE at Changmao Biochemical Engineering doesn't inspire confidence. To be more specific, ROCE has fallen from 7.1% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Changmao Biochemical Engineering have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 30% over the last five years, so it looks like investors are recognizing these changes. Unless these trends revert to a more positive trajectory, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with Changmao Biochemical Engineering and understanding these should be part of your investment process.

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. 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.
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