XTC New Energy Materials(Xiamen)Ltd (SHSE:688778) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at XTC New Energy Materials(Xiamen)Ltd (SHSE:688778), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 XTC New Energy Materials(Xiamen)Ltd is:

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

0.07 = CN¥701m ÷ (CN¥14b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

Therefore, XTC New Energy Materials(Xiamen)Ltd has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.4%.

Check out our latest analysis for XTC New Energy Materials(Xiamen)Ltd

In the above chart we have measured XTC New Energy Materials(Xiamen)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for XTC New Energy Materials(Xiamen)Ltd .

The Trend Of ROCE

On the surface, the trend of ROCE at XTC New Energy Materials(Xiamen)Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.0% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, XTC New Energy Materials(Xiamen)Ltd has done well to pay down its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On XTC New Energy Materials(Xiamen)Ltd's ROCE

We're a bit apprehensive about XTC New Energy Materials(Xiamen)Ltd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for XTC New Energy Materials(Xiamen)Ltd that we think you should be aware of.

While XTC New Energy Materials(Xiamen)Ltd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.