We're Watching These Trends At China Sunsine Chemical Holdings (SGX:QES)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at China Sunsine Chemical Holdings (SGX:QES), it didn't seem to tick all of these boxes.

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 China Sunsine Chemical Holdings is:

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

0.073 = CN¥189m ÷ (CN¥2.9b - CN¥331m) (Based on the trailing twelve months to June 2020).

Thus, China Sunsine Chemical Holdings has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.1%.

Check out our latest analysis for China Sunsine Chemical Holdings

In the above chart we have measured China Sunsine Chemical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Sunsine Chemical Holdings here for free.

The Trend Of ROCE

When we looked at the ROCE trend at China Sunsine Chemical Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 29% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a related note, China Sunsine Chemical Holdings has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by China Sunsine Chemical Holdings' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 276% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Sunsine Chemical Holdings does have some risks though, and we've spotted 1 warning sign for China Sunsine Chemical Holdings that you might be interested in.

While China Sunsine Chemical Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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