We Like Sichuan Shengda Forestry Industry's (SZSE:002259) Returns And Here's How They're Trending

Simply Wall St ·  Dec 15, 2022 17:50

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Sichuan Shengda Forestry Industry (SZSE:002259) we really liked what we saw.

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. To calculate this metric for Sichuan Shengda Forestry Industry, this is the formula:

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

0.21 = CN¥66m ÷ (CN¥1.0b - CN¥720m) (Based on the trailing twelve months to September 2022).

Therefore, Sichuan Shengda Forestry Industry has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 15%.

View our latest analysis for Sichuan Shengda Forestry Industry

roceSZSE:002259 Return on Capital Employed December 15th 2022

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'd like to look at how Sichuan Shengda Forestry Industry has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sichuan Shengda Forestry Industry Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Sichuan Shengda Forestry Industry. The figures show that over the last five years, returns on capital have grown by 695%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Sichuan Shengda Forestry Industry appears to been achieving more with less, since the business is using 86% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 70% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Sichuan Shengda Forestry Industry's ROCE

In a nutshell, we're pleased to see that Sichuan Shengda Forestry Industry has been able to generate higher returns from less capital. And since the stock has fallen 48% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Sichuan Shengda Forestry Industry looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 002259 is currently trading for a fair price.

Sichuan Shengda Forestry Industry is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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