What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Satellite ChemicalLtd (SZSE:002648), 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. To calculate this metric for Satellite ChemicalLtd, this is the formula:

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

0.087 = CN¥4.4b ÷ (CN¥60b - CN¥9.8b) (Based on the trailing twelve months to September 2023).

Thus, Satellite ChemicalLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

Above you can see how the current ROCE for Satellite ChemicalLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Satellite ChemicalLtd .

So How Is Satellite ChemicalLtd's ROCE Trending?

In terms of Satellite ChemicalLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.7% from 13% five years ago. 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.

On a related note, Satellite ChemicalLtd has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Satellite ChemicalLtd is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 246% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Satellite ChemicalLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Satellite ChemicalLtd 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.