Capital Allocation Trends At Sanxiang Advanced Materials (SHSE:603663) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Sanxiang Advanced Materials (SHSE:603663) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Sanxiang Advanced Materials is:

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

0.12 = CN¥168m ÷ (CN¥2.0b - CN¥601m) (Based on the trailing twelve months to September 2023).

Thus, Sanxiang Advanced Materials has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.0% it's much better.

Check out our latest analysis for Sanxiang Advanced Materials

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

How Are Returns Trending?

In terms of Sanxiang Advanced Materials' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Sanxiang Advanced Materials is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 69% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Sanxiang Advanced Materials does have some risks though, and we've spotted 2 warning signs for Sanxiang Advanced Materials that you might be interested in.

While Sanxiang Advanced Materials 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.