The Returns On Capital At Suzhou Xingye Materials TechnologyLtd (SHSE:603928) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Suzhou Xingye Materials TechnologyLtd (SHSE:603928), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Suzhou Xingye Materials TechnologyLtd is:

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

0.041 = CN¥62m ÷ (CN¥1.7b - CN¥202m) (Based on the trailing twelve months to September 2024).

So, Suzhou Xingye Materials TechnologyLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

Check out our latest analysis for Suzhou Xingye Materials TechnologyLtd

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Suzhou Xingye Materials TechnologyLtd. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Suzhou Xingye Materials TechnologyLtd becoming one if things continue as they have.

The Bottom Line On Suzhou Xingye Materials TechnologyLtd's ROCE

In summary, it's unfortunate that Suzhou Xingye Materials TechnologyLtd is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 65% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Suzhou Xingye Materials TechnologyLtd, we've spotted 4 warning signs, and 1 of them is concerning.

While Suzhou Xingye Materials TechnologyLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.