Will Changmao Biochemical Engineering (HKG:954) Multiply In Value Going Forward?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.055 = 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%. In absolute terms, that's a low return and it also 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'd like to look at how Changmao Biochemical Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Changmao Biochemical Engineering, we didn't gain much confidence. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 5.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Changmao Biochemical Engineering's ROCE

In summary, we're somewhat concerned by Changmao Biochemical Engineering's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Changmao Biochemical Engineering does have some risks though, and we've spotted 3 warning signs for Changmao Biochemical Engineering that you might be interested in.

While Changmao Biochemical Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading Changmao Biochemical Engineering or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.