What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Dymatic ChemicalsInc (SZSE:002054), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dymatic ChemicalsInc is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = CN¥82m ÷ (CN¥6.8b - CN¥1.4b) (Based on the trailing twelve months to June 2024).
Therefore, Dymatic ChemicalsInc has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.
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 Dymatic ChemicalsInc's past further, check out this free graph covering Dymatic ChemicalsInc's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Dymatic ChemicalsInc, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.7% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Dymatic ChemicalsInc have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Dymatic ChemicalsInc we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.
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.
