Some Investors May Be Worried About Xinjiang Joinworld's (SHSE:600888) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Xinjiang Joinworld (SHSE:600888) 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 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 Xinjiang Joinworld:

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

0.028 = CN¥376m ÷ (CN¥17b - CN¥3.8b) (Based on the trailing twelve months to September 2024).

Therefore, Xinjiang Joinworld has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.

Check out our latest analysis for Xinjiang Joinworld

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinjiang Joinworld's ROCE against it's prior returns. If you'd like to look at how Xinjiang Joinworld has performed in the past in other metrics, you can view this free graph of Xinjiang Joinworld's past earnings, revenue and cash flow.

What Does the ROCE Trend For Xinjiang Joinworld Tell Us?

When we looked at the ROCE trend at Xinjiang Joinworld, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.8% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Xinjiang Joinworld has done well to pay down its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Xinjiang Joinworld's ROCE

In summary, Xinjiang Joinworld is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 98% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Xinjiang Joinworld does come with some risks, and we've found 1 warning sign that you should be aware of.

While Xinjiang Joinworld 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.