Returns On Capital Signal Tricky Times Ahead For Xi'an Triangle DefenseLtd (SZSE:300775)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Xi'an Triangle DefenseLtd (SZSE:300775) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Xi'an Triangle DefenseLtd is:

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

0.053 = CN¥354m ÷ (CN¥9.2b - CN¥2.5b) (Based on the trailing twelve months to September 2024).

Therefore, Xi'an Triangle DefenseLtd has an ROCE of 5.3%. On its own, that's a low figure but it's around the 4.4% average generated by the Aerospace & Defense industry.

Check out our latest analysis for Xi'an Triangle DefenseLtd

Above you can see how the current ROCE for Xi'an Triangle DefenseLtd 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 Xi'an Triangle DefenseLtd .

What Can We Tell From Xi'an Triangle DefenseLtd's ROCE Trend?

On the surface, the trend of ROCE at Xi'an Triangle DefenseLtd doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 27%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Xi'an Triangle DefenseLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Xi'an Triangle DefenseLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Xi'an Triangle DefenseLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.