Be Wary Of Xiamen Voke Mold & Plastic Engineering (SZSE:301196) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Xiamen Voke Mold & Plastic Engineering (SZSE:301196), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Xiamen Voke Mold & Plastic Engineering:

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

0.029 = CN¥92m ÷ (CN¥3.6b - CN¥413m) (Based on the trailing twelve months to September 2023).

Thus, Xiamen Voke Mold & Plastic Engineering has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.

View our latest analysis for Xiamen Voke Mold & Plastic Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiamen Voke Mold & Plastic Engineering's ROCE against it's prior returns. If you're interested in investigating Xiamen Voke Mold & Plastic Engineering's past further, check out this free graph covering Xiamen Voke Mold & Plastic Engineering's past earnings, revenue and cash flow.

What Can We Tell From Xiamen Voke Mold & Plastic Engineering's ROCE Trend?

On the surface, the trend of ROCE at Xiamen Voke Mold & Plastic Engineering doesn't inspire confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Xiamen Voke Mold & Plastic Engineering has decreased its current liabilities to 12% 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. 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.

What We Can Learn From Xiamen Voke Mold & Plastic Engineering's ROCE

While returns have fallen for Xiamen Voke Mold & Plastic Engineering in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 22% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 2 warning signs facing Xiamen Voke Mold & Plastic Engineering that you might find interesting.

While Xiamen Voke Mold & Plastic Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.