Be Wary Of Zhejiang XCC GroupLtd (SHSE:603667) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Zhejiang XCC GroupLtd (SHSE:603667) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Zhejiang XCC GroupLtd, this is the formula:

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

0.046 = CN¥147m ÷ (CN¥5.2b - CN¥2.0b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang XCC GroupLtd has an ROCE of 4.6%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

View our latest analysis for Zhejiang XCC GroupLtd

Above you can see how the current ROCE for Zhejiang XCC 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 Zhejiang XCC GroupLtd .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Zhejiang XCC GroupLtd's ROCE has reduced by 41% over the last five years, while the business employed 70% more capital. Usually this isn't ideal, but given Zhejiang XCC GroupLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhejiang XCC GroupLtd's earnings and if they change as a result from the capital raise.

Our Take On Zhejiang XCC GroupLtd's ROCE

In summary, Zhejiang XCC GroupLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 80% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.