Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at China Sanjiang Fine Chemicals (HKG:2198) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for China Sanjiang Fine Chemicals, this is the formula:

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

0.10 = CN¥827m ÷ (CN¥21b - CN¥13b) (Based on the trailing twelve months to June 2024).

So, China Sanjiang Fine Chemicals has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Chemicals industry.

Check out our latest analysis for China Sanjiang Fine Chemicals

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 , check out these free graphs detailing revenue and cash flow performance of China Sanjiang Fine Chemicals.

What The Trend Of ROCE Can Tell Us

China Sanjiang Fine Chemicals has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 10% on its capital. And unsurprisingly, like most companies trying to break into the black, China Sanjiang Fine Chemicals is utilizing 130% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a separate but related note, it's important to know that China Sanjiang Fine Chemicals has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Long story short, we're delighted to see that China Sanjiang Fine Chemicals' reinvestment activities have paid off and the company is now profitable. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about China Sanjiang Fine Chemicals, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

While China Sanjiang Fine Chemicals 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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