What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Liaoning Cheng Da (SHSE:600739), it didn't seem to tick all of these boxes.
Understanding 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 Liaoning Cheng Da:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CN¥480m ÷ (CN¥47b - CN¥11b) (Based on the trailing twelve months to September 2023).
So, Liaoning Cheng Da has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 5.5%.
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're interested in investigating Liaoning Cheng Da's past further, check out this free graph covering Liaoning Cheng Da's past earnings, revenue and cash flow.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Liaoning Cheng Da. The company has employed 34% more capital in the last five years, and the returns on that capital have remained stable at 1.3%. 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 Liaoning Cheng Da's ROCE
Long story short, while Liaoning Cheng Da has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Liaoning Cheng Da has the makings of a multi-bagger.
On a final note, we've found 3 warning signs for Liaoning Cheng Da that we think you should be aware of.
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.