What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 China National Chemical Engineering (SHSE:601117), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China National Chemical Engineering is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥5.9b ÷ (CN¥212b - CN¥137b) (Based on the trailing twelve months to September 2023).
So, China National Chemical Engineering has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Construction industry average of 6.8%.
Above you can see how the current ROCE for China National Chemical Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China National Chemical Engineering for free.
So How Is China National Chemical Engineering's ROCE Trending?
In terms of China National Chemical Engineering's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 88% 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.
On a side note, China National Chemical Engineering's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, China National Chemical Engineering has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 8.6% 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.
On a final note, we've found 1 warning sign for China National Chemical Engineering that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.