What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Liaoning Cheng Da (SHSE:600739) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Liaoning Cheng Da is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CN¥480m ÷ (CN¥47b - CN¥11b) (Based on the trailing twelve months to September 2023).
Thus, Liaoning Cheng Da has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 5.5%.
See our latest analysis for Liaoning Cheng Da
Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Cheng Da's ROCE against it's prior returns. If you'd like to look at how Liaoning Cheng Da has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Liaoning Cheng Da. Over the past five years, ROCE has remained relatively flat at around 1.3% and the business has deployed 34% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Liaoning Cheng Da's ROCE
Long story short, while Liaoning Cheng Da has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 17% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a separate note, we've found 3 warning signs for Liaoning Cheng Da you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.