If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 CNSIG Inner Mongolia Chemical IndustryLtd (SHSE:600328) 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. The formula for this calculation on CNSIG Inner Mongolia Chemical IndustryLtd is:

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

0.16 = CN¥2.2b ÷ (CN¥19b - CN¥5.0b) (Based on the trailing twelve months to September 2023).

Thus, CNSIG Inner Mongolia Chemical IndustryLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

View our latest analysis for CNSIG Inner Mongolia Chemical IndustryLtd

Above you can see how the current ROCE for CNSIG Inner Mongolia Chemical IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CNSIG Inner Mongolia Chemical IndustryLtd.

What Does the ROCE Trend For CNSIG Inner Mongolia Chemical IndustryLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 25% five years ago, while capital employed has grown 338%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. CNSIG Inner Mongolia Chemical IndustryLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, CNSIG Inner Mongolia Chemical IndustryLtd has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On CNSIG Inner Mongolia Chemical IndustryLtd's ROCE

In summary, we're somewhat concerned by CNSIG Inner Mongolia Chemical IndustryLtd's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 62% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 2 warning signs facing CNSIG Inner Mongolia Chemical IndustryLtd that you might find interesting.

While CNSIG Inner Mongolia Chemical IndustryLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.