Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating China BlueChemical (HKG:3983), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China BlueChemical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥1.5b ÷ (CN¥24b - CN¥3.1b) (Based on the trailing twelve months to June 2023).
Thus, China BlueChemical has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10%.
View our latest analysis for China BlueChemical
SEHK:3983 Return on Capital Employed August 28th 2023
Above you can see how the current ROCE for China BlueChemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China BlueChemical here for free.
The Trend Of ROCE
The returns on capital haven't changed much for China BlueChemical in recent years. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 32% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From China BlueChemical's ROCE
In conclusion, China BlueChemical has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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 final note, you should learn about the 3 warning signs we've spotted with China BlueChemical (including 1 which is a bit concerning) .
While China BlueChemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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