There Are Reasons To Feel Uneasy About Xiamen Intretech's (SZSE:002925) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Xiamen Intretech (SZSE:002925) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Xiamen Intretech is:

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

0.071 = CN¥368m ÷ (CN¥6.8b - CN¥1.6b) (Based on the trailing twelve months to June 2024).

Thus, Xiamen Intretech has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.0%.

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're interested, you can view the analysts predictions in our free analyst report for Xiamen Intretech .

So How Is Xiamen Intretech's ROCE Trending?

In terms of Xiamen Intretech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 21% five years ago. However it looks like Xiamen Intretech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Xiamen Intretech is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Xiamen Intretech has the makings of a multi-bagger.

If you want to continue researching Xiamen Intretech, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Xiamen Intretech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.