Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shandong Sinocera Functional Material (SZSE:300285), we don't think it's current trends fit the mold of a multi-bagger.

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 Sinocera Functional Material:

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

0.091 = CN¥693m ÷ (CN¥9.0b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Sinocera Functional Material has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Above you can see how the current ROCE for Shandong Sinocera Functional Material 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 Shandong Sinocera Functional Material for free.

What Can We Tell From Shandong Sinocera Functional Material's ROCE Trend?

In terms of Shandong Sinocera Functional Material's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Shandong Sinocera Functional Material's ROCE

While returns have fallen for Shandong Sinocera Functional Material in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While Shandong Sinocera Functional Material doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 300285 on our platform.

While Shandong Sinocera Functional Material may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.