Xi'an Triangle DefenseLtd's (SZSE:300775) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Xi'an Triangle DefenseLtd (SZSE:300775) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Xi'an Triangle DefenseLtd:

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

0.094 = CN¥635m ÷ (CN¥9.2b - CN¥2.5b) (Based on the trailing twelve months to June 2024).

Thus, Xi'an Triangle DefenseLtd has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.1%.

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'd like, you can check out the forecasts from the analysts covering Xi'an Triangle DefenseLtd for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Xi'an Triangle DefenseLtd. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 274% more capital into its operations. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 27% of total assets, this reported ROCE would probably be less than9.4% because total capital employed would be higher.The 9.4% ROCE could be even lower if current liabilities weren't 27% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line

In conclusion, Xi'an Triangle DefenseLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 27% 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 Xi'an Triangle DefenseLtd has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Xi'an Triangle DefenseLtd and understanding them should be part of your investment process.

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.