Investors Could Be Concerned With Xinyaqiang Silicon ChemistryLtd's (SHSE:603155) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Xinyaqiang Silicon ChemistryLtd (SHSE:603155) and its ROCE trend, we weren't exactly thrilled.

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 Xinyaqiang Silicon ChemistryLtd, this is the formula:

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

0.026 = CN¥63m ÷ (CN¥2.6b - CN¥155m) (Based on the trailing twelve months to June 2024).

Therefore, Xinyaqiang Silicon ChemistryLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

View our latest analysis for Xinyaqiang Silicon ChemistryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinyaqiang Silicon ChemistryLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xinyaqiang Silicon ChemistryLtd.

The Trend Of ROCE

On the surface, the trend of ROCE at Xinyaqiang Silicon ChemistryLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line On Xinyaqiang Silicon ChemistryLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Xinyaqiang Silicon ChemistryLtd 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 56% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Xinyaqiang Silicon ChemistryLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are significant...

While Xinyaqiang Silicon ChemistryLtd 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.