Hubei Sanxia New Building Materials' (SHSE:600293) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Hubei Sanxia New Building Materials (SHSE:600293) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hubei Sanxia New Building Materials is:

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

0.08 = CN¥186m ÷ (CN¥3.6b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Hubei Sanxia New Building Materials has an ROCE of 8.0%. On its own, that's a low figure but it's around the 7.4% average generated by the Building industry.

Check out our latest analysis for Hubei Sanxia New Building Materials

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 Hubei Sanxia New Building Materials' past further, check out this free graph covering Hubei Sanxia New Building Materials' past earnings, revenue and cash flow.

How Are Returns Trending?

We're a bit concerned with the trends, because the business is applying 45% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 8.0%, it's hard to get excited about these developments.

Our Take On Hubei Sanxia New Building Materials' ROCE

It's a shame to see that Hubei Sanxia New Building Materials is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in Hubei Sanxia New Building Materials it's worth checking out our FREE intrinsic value approximation for 600293 to see if it's trading at an attractive price in other respects.

While Hubei Sanxia New Building Materials 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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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.