Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Zhejiang Sanmei Chemical IndustryLtd (SHSE:603379), it didn't seem to tick all of these boxes.

Understanding 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 Zhejiang Sanmei Chemical IndustryLtd:

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

0.047 = CN¥288m ÷ (CN¥6.8b - CN¥724m) (Based on the trailing twelve months to March 2024).

So, Zhejiang Sanmei Chemical IndustryLtd has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

In the above chart we have measured Zhejiang Sanmei Chemical IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Sanmei Chemical IndustryLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Zhejiang Sanmei Chemical IndustryLtd, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 4.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Zhejiang Sanmei Chemical IndustryLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Sanmei Chemical IndustryLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Zhejiang Sanmei Chemical IndustryLtd, we've discovered 1 warning sign that you should be aware of.

While Zhejiang Sanmei Chemical IndustryLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com