If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shandong Fiberglass Group (SHSE:605006), it didn't seem to tick all of these boxes.
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shandong Fiberglass Group is: carbon fibre tube
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0016 = CN¥6.8m ÷ (CN¥5.7b - CN¥1.4b) (Based on the trailing twelve months to September 2023).
Thus, Shandong Fiberglass Group has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.9%.
View our latest analysis for Shandong Fiberglass Group
In the above chart we have measured Shandong Fiberglass Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shandong Fiberglass Group for free.
When we looked at the ROCE trend at Shandong Fiberglass Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Shandong Fiberglass Group has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In summary, we're somewhat concerned by Shandong Fiberglass Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 54% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing: We've identified 4 warning signs with Shandong Fiberglass Group (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.
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.
Find out whether Shandong Fiberglass Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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Shandong Fiberglass Group Co., Ltd engages in the research and development, production, and sale of glass fiber and related products in China and internationally.
Undervalued with high growth potential.
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