There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Shandong Fengyuan Chemical (SZSE:002805) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shandong Fengyuan Chemical:

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

0.012 = CN¥51m ÷ (CN¥7.0b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Shandong Fengyuan Chemical has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for Shandong Fengyuan Chemical

In the above chart we have measured Shandong Fengyuan Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shandong Fengyuan Chemical.

What Can We Tell From Shandong Fengyuan Chemical's ROCE Trend?

We weren't thrilled with the trend because Shandong Fengyuan Chemical's ROCE has reduced by 70% over the last five years, while the business employed 606% more capital. Usually this isn't ideal, but given Shandong Fengyuan Chemical conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shandong Fengyuan Chemical might not have received a full period of earnings contribution from it.

On a side note, Shandong Fengyuan Chemical's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Shandong Fengyuan Chemical's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shandong Fengyuan Chemical. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Shandong Fengyuan Chemical we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.