Be Wary Of Xiamen Yanjan New Material (SZSE:300658) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Xiamen Yanjan New Material (SZSE:300658) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Xiamen Yanjan New Material:

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

0.028 = CN¥54m ÷ (CN¥2.7b - CN¥789m) (Based on the trailing twelve months to September 2023).

Therefore, Xiamen Yanjan New Material has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 5.9%.

See our latest analysis for Xiamen Yanjan New Material

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Xiamen Yanjan New Material's past further, check out this free graph covering Xiamen Yanjan New Material's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Xiamen Yanjan New Material's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.0% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Xiamen Yanjan New Material's ROCE

Bringing it all together, while we're somewhat encouraged by Xiamen Yanjan New Material's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 43% 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 Xiamen Yanjan New Material has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Xiamen Yanjan New Material (of which 2 are a bit unpleasant!) that you should know about.

While Xiamen Yanjan New Material 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.