Investors Could Be Concerned With Xinfengming Group's (SHSE:603225) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Xinfengming Group (SHSE:603225) 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. The formula for this calculation on Xinfengming Group is:

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

0.026 = CN¥738m ÷ (CN¥50b - CN¥21b) (Based on the trailing twelve months to September 2023).

So, Xinfengming Group has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

See our latest analysis for Xinfengming Group

In the above chart we have measured Xinfengming Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinfengming Group .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Xinfengming Group's ROCE has reduced by 90% over the last five years, while the business employed 164% more capital. Usually this isn't ideal, but given Xinfengming Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Xinfengming Group's earnings and if they change as a result from the capital raise.

On a separate but related note, it's important to know that Xinfengming Group has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

While returns have fallen for Xinfengming Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Xinfengming Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Xinfengming Group 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.