If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Shandong Dawn PolymerLtd (SZSE:002838), we don't think it's current trends fit the mold of a multi-bagger.
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 Shandong Dawn PolymerLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = CN¥103m ÷ (CN¥4.8b - CN¥1.1b) (Based on the trailing twelve months to June 2023).
So, Shandong Dawn PolymerLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.8%.
Check out our latest analysis for Shandong Dawn PolymerLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Dawn PolymerLtd's ROCE against it's prior returns. If you'd like to look at how Shandong Dawn PolymerLtd 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
Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 299%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shandong Dawn PolymerLtd might not have received a full period of earnings contribution from it.
Our Take On Shandong Dawn PolymerLtd's ROCE
To conclude, we've found that Shandong Dawn PolymerLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 19% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 3 warning signs with Shandong Dawn PolymerLtd and understanding these should be part of your investment process.
While Shandong Dawn PolymerLtd 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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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.