Be Wary Of Zhejiang Xidamen New MaterialLtd (SHSE:605155) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Zhejiang Xidamen New MaterialLtd (SHSE:605155) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Zhejiang Xidamen New MaterialLtd:

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

0.085 = CN¥106m ÷ (CN¥1.3b - CN¥92m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Xidamen New MaterialLtd has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

Check out our latest analysis for Zhejiang Xidamen New MaterialLtd

Above you can see how the current ROCE for Zhejiang Xidamen New MaterialLtd 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 Xidamen New MaterialLtd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhejiang Xidamen New MaterialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Zhejiang Xidamen New MaterialLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Xidamen New MaterialLtd. In light of this, the stock has only gained 21% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Zhejiang Xidamen New MaterialLtd it's worth checking out our FREE intrinsic value approximation for 605155 to see if it's trading at an attractive price in other respects.

While Zhejiang Xidamen New MaterialLtd 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.