China BlueChemical (HKG:3983) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China BlueChemical (HKG:3983), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China BlueChemical:

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

0.044 = CN¥948m ÷ (CN¥24b - CN¥2.5b) (Based on the trailing twelve months to December 2024).

So, China BlueChemical has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.9%.

View our latest analysis for China BlueChemical

In the above chart we have measured China BlueChemical's 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 analyst report for China BlueChemical .

What Does the ROCE Trend For China BlueChemical Tell Us?

In terms of China BlueChemical's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.1% over the last five years. However it looks like China BlueChemical 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 China BlueChemical's ROCE

To conclude, we've found that China BlueChemical is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

China BlueChemical does have some risks though, and we've spotted 2 warning signs for China BlueChemical that you might be interested in.

While China BlueChemical 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.

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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.