Be Wary Of Xiamen ITG GroupLtd (SHSE:600755) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Xiamen ITG GroupLtd (SHSE:600755), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Xiamen ITG GroupLtd is:

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

0.021 = CN¥1.0b ÷ (CN¥122b - CN¥72b) (Based on the trailing twelve months to September 2024).

Thus, Xiamen ITG GroupLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.0%.

View our latest analysis for Xiamen ITG GroupLtd

Above you can see how the current ROCE for Xiamen ITG GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xiamen ITG GroupLtd .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Xiamen ITG GroupLtd's ROCE has reduced by 72% over the last five years, while the business employed 43% more capital. That being said, Xiamen ITG GroupLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Xiamen ITG GroupLtd might not have received a full period of earnings contribution from it.

On a separate but related note, it's important to know that Xiamen ITG GroupLtd has a current liabilities to total assets ratio of 59%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Xiamen ITG GroupLtd's ROCE

We're a bit apprehensive about Xiamen ITG GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 31% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Xiamen ITG GroupLtd that you might find interesting.

While Xiamen ITG GroupLtd 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.