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Be Wary Of Shandong Dawn PolymerLtd (SZSE:002838) And Its Returns On Capital

Simply Wall St ·  Feb 27 22:03

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at Shandong Dawn PolymerLtd (SZSE:002838), it didn't seem to tick all of these boxes.

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)

0.034 = CN¥128m ÷ (CN¥4.8b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Shandong Dawn PolymerLtd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

roce
SZSE:002838 Return on Capital Employed February 28th 2024

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're interested in investigating Shandong Dawn PolymerLtd's past further, check out this free graph covering Shandong Dawn PolymerLtd's past earnings, revenue and cash flow.

What Can We Tell From Shandong Dawn PolymerLtd's ROCE Trend?

When we looked at the ROCE trend at Shandong Dawn PolymerLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Shandong Dawn PolymerLtd 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.

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 appear hesitant that the trends will pick up because the stock has fallen 16% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Shandong Dawn PolymerLtd does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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