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. 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. Having said that, from a first glance at China Shanshui Cement Group (HKG:691) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Shanshui Cement Group, this is the formula:

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

0.066 = CN¥1.4b ÷ (CN¥33b - CN¥12b) (Based on the trailing twelve months to June 2023).

Therefore, China Shanshui Cement Group has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 4.2%.

Check out our latest analysis for China Shanshui Cement Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Shanshui Cement Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is China Shanshui Cement Group's ROCE Trending?

In terms of China Shanshui Cement Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 53%, but since then they've fallen to 6.6%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, China Shanshui Cement Group has done well to pay down its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On China Shanshui Cement Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for China Shanshui Cement Group have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 72% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

China Shanshui Cement Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While China Shanshui Cement Group 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.