XTC New Energy Materials(Xiamen)Ltd (SHSE:688778) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating XTC New Energy Materials(Xiamen)Ltd (SHSE:688778), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for XTC New Energy Materials(Xiamen)Ltd:

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

0.054 = CN¥513m ÷ (CN¥15b - CN¥5.1b) (Based on the trailing twelve months to December 2024).

Therefore, XTC New Energy Materials(Xiamen)Ltd has an ROCE of 5.4%. On its own, that's a low figure but it's around the 5.8% average generated by the Electrical industry.

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

Above you can see how the current ROCE for XTC New Energy Materials(Xiamen)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for XTC New Energy Materials(Xiamen)Ltd .

What Can We Tell From XTC New Energy Materials(Xiamen)Ltd's ROCE Trend?

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 8.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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 related note, XTC New Energy Materials(Xiamen)Ltd has decreased its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for XTC New Energy Materials(Xiamen)Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 18% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

XTC New Energy Materials(Xiamen)Ltd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688778 on our platform quite valuable.

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.