Investors Could Be Concerned With Xiamen Intretech's (SZSE:002925) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Xiamen Intretech (SZSE:002925) 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. To calculate this metric for Xiamen Intretech, this is the formula:

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

0.055 = CN¥287m ÷ (CN¥7.0b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Thus, Xiamen Intretech has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

See our latest analysis for Xiamen Intretech

In the above chart we have measured Xiamen Intretech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Xiamen Intretech for free.

How Are Returns Trending?

When we looked at the ROCE trend at Xiamen Intretech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 21% five years ago. 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.

What We Can Learn From Xiamen Intretech's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Xiamen Intretech 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 47% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Xiamen Intretech (of which 1 shouldn't be ignored!) that you should know about.

While Xiamen Intretech 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.