Xiamen Solex High-tech Industries (SHSE:603992) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Xiamen Solex High-tech Industries (SHSE:603992), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Xiamen Solex High-tech Industries:

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

0.13 = CN¥435m ÷ (CN¥4.2b - CN¥761m) (Based on the trailing twelve months to June 2024).

Therefore, Xiamen Solex High-tech Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Building industry.

View our latest analysis for Xiamen Solex High-tech Industries

Above you can see how the current ROCE for Xiamen Solex High-tech Industries 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 Solex High-tech Industries .

The Trend Of ROCE

On the surface, the trend of ROCE at Xiamen Solex High-tech Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Xiamen Solex High-tech Industries' ROCE

Bringing it all together, while we're somewhat encouraged by Xiamen Solex High-tech Industries' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 10% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 1 warning sign for Xiamen Solex High-tech Industries that we think you should be aware of.

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.