Some Investors May Be Worried About Zhejiang XCC GroupLtd's (SHSE:603667) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Zhejiang XCC GroupLtd (SHSE:603667) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Zhejiang XCC GroupLtd is:

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

0.037 = CN¥120m ÷ (CN¥5.1b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang XCC GroupLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

Check out our latest analysis for Zhejiang XCC GroupLtd

In the above chart we have measured Zhejiang XCC GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang XCC GroupLtd .

The Trend Of ROCE

In terms of Zhejiang XCC GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 3.7%. However it looks like Zhejiang XCC GroupLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Zhejiang XCC GroupLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 253% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Zhejiang XCC GroupLtd we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Zhejiang XCC GroupLtd 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.