Returns At Xinjiang Communications Construction Group (SZSE:002941) Appear To Be Weighed Down

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Xinjiang Communications Construction Group (SZSE:002941) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Xinjiang Communications Construction Group, this is the formula:

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

0.052 = CN¥537m ÷ (CN¥18b - CN¥8.1b) (Based on the trailing twelve months to June 2024).

Therefore, Xinjiang Communications Construction Group has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.7% average generated by the Construction industry.

View our latest analysis for Xinjiang Communications Construction Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xinjiang Communications Construction Group.

So How Is Xinjiang Communications Construction Group's ROCE Trending?

The returns on capital haven't changed much for Xinjiang Communications Construction Group in recent years. The company has employed 116% more capital in the last five years, and the returns on that capital have remained stable at 5.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Xinjiang Communications Construction Group has done well to reduce current liabilities to 44% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 44%, some of that risk is still prevalent.

Our Take On Xinjiang Communications Construction Group's ROCE

Long story short, while Xinjiang Communications Construction Group has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Xinjiang Communications Construction Group has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Xinjiang Communications Construction Group (at least 1 which is potentially serious) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.