Hubei Xingfa Chemicals Group (SHSE:600141) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hubei Xingfa Chemicals Group (SHSE:600141) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hubei Xingfa Chemicals Group, this is the formula:

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

0.083 = CN¥2.7b ÷ (CN¥47b - CN¥14b) (Based on the trailing twelve months to September 2024).

So, Hubei Xingfa Chemicals Group has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

See our latest analysis for Hubei Xingfa Chemicals Group

Above you can see how the current ROCE for Hubei Xingfa Chemicals Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hubei Xingfa Chemicals Group .

How Are Returns Trending?

The returns on capital haven't changed much for Hubei Xingfa Chemicals Group in recent years. The company has employed 158% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 29% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

As we've seen above, Hubei Xingfa Chemicals Group's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 117% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with Hubei Xingfa Chemicals Group (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Hubei Xingfa Chemicals Group 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.