What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Lianhe Chemical TechnologyLtd (SZSE:002250), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Lianhe Chemical TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥248m ÷ (CN¥14b - CN¥3.9b) (Based on the trailing twelve months to September 2023).
Thus, Lianhe Chemical TechnologyLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.
Check out our latest analysis for Lianhe Chemical TechnologyLtd
Above you can see how the current ROCE for Lianhe Chemical TechnologyLtd 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 Lianhe Chemical TechnologyLtd.
What Does the ROCE Trend For Lianhe Chemical TechnologyLtd Tell Us?
The returns on capital haven't changed much for Lianhe Chemical TechnologyLtd in recent years. The company has employed 78% more capital in the last five years, and the returns on that capital have remained stable at 2.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Lianhe Chemical TechnologyLtd's ROCE
In conclusion, Lianhe Chemical TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you want to continue researching Lianhe Chemical TechnologyLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.
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.
