If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Swancor Advanced Materials (SHSE:688585) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Swancor Advanced Materials, this is the formula:

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

0.064 = CN¥70m ÷ (CN¥1.7b - CN¥646m) (Based on the trailing twelve months to June 2022).

Thus, Swancor Advanced Materials has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.8%.

View our latest analysis for Swancor Advanced Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Swancor Advanced Materials' ROCE against it's prior returns. If you'd like to look at how Swancor Advanced Materials has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Swancor Advanced Materials' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.4% for the last four years, and the capital employed within the business has risen 38% in that time. 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.

In Conclusion...

In summary, Swancor Advanced Materials has simply been reinvesting capital and generating the same low rate of return as before. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. 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.

One more thing: We've identified 2 warning signs with Swancor Advanced Materials (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Swancor Advanced Materials 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.