Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shandong Taihe Technologies (SZSE:300801), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Shandong Taihe Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥198m ÷ (CN¥2.9b - CN¥407m) (Based on the trailing twelve months to September 2023).
So, Shandong Taihe Technologies has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.
View our latest analysis for Shandong Taihe Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Taihe Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shandong Taihe Technologies, check out these free graphs here.
What Can We Tell From Shandong Taihe Technologies' ROCE Trend?
On the surface, the trend of ROCE at Shandong Taihe Technologies doesn't inspire confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 8.0%. 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, Shandong Taihe Technologies has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Key Takeaway
We're a bit apprehensive about Shandong Taihe Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 22% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to continue researching Shandong Taihe Technologies, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Shandong Taihe Technologies 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.