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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Liaoning Dingjide Petrochemical (SHSE:603255) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Liaoning Dingjide Petrochemical, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥79m ÷ (CN¥1.9b - CN¥323m) (Based on the trailing twelve months to June 2023).
Therefore, Liaoning Dingjide Petrochemical has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.8%.
Check out our latest analysis for Liaoning Dingjide Petrochemical
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 want to delve into the historical earnings, revenue and cash flow of Liaoning Dingjide Petrochemical, check out these free graphs here.
What Does the ROCE Trend For Liaoning Dingjide Petrochemical Tell Us?
When we looked at the ROCE trend at Liaoning Dingjide Petrochemical, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 4.9% from 18% three years ago. However it looks like Liaoning Dingjide Petrochemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Liaoning Dingjide Petrochemical's ROCE
To conclude, we've found that Liaoning Dingjide Petrochemical is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 26% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 2 warning signs for Liaoning Dingjide Petrochemical (1 doesn't sit too well with us) you should be aware of.
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.