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China Sunsine Chemical Holdings (SGX:QES) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at China Sunsine Chemical Holdings (SGX:QES), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on China Sunsine Chemical Holdings is:

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

0.18 = CN¥650m ÷ (CN¥4.2b - CN¥533m) (Based on the trailing twelve months to December 2022).

So, China Sunsine Chemical Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Chemicals industry.

See our latest analysis for China Sunsine Chemical Holdings

roce
roce

In the above chart we have measured China Sunsine Chemical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at China Sunsine Chemical Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. However it looks like China Sunsine Chemical Holdings 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On China Sunsine Chemical Holdings' ROCE

In summary, China Sunsine Chemical Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last five years. Therefore based on the analysis done in this article, we don't think China Sunsine Chemical Holdings has the makings of a multi-bagger.

On a final note, we found 3 warning signs for China Sunsine Chemical Holdings (2 can't be ignored) you should be aware of.

While China Sunsine Chemical Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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