Yueyang Xingchang Petro-Chemical (SZSE:000819) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Yueyang Xingchang Petro-Chemical (SZSE:000819) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Yueyang Xingchang Petro-Chemical, this is the formula:

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

0.048 = CN¥123m ÷ (CN¥3.1b - CN¥540m) (Based on the trailing twelve months to March 2024).

So, Yueyang Xingchang Petro-Chemical has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

View our latest analysis for Yueyang Xingchang Petro-Chemical

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Yueyang Xingchang Petro-Chemical's past further, check out this free graph covering Yueyang Xingchang Petro-Chemical's past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Yueyang Xingchang Petro-Chemical's ROCE has reduced by 30% over the last five years, while the business employed 234% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Yueyang Xingchang Petro-Chemical probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

To conclude, we've found that Yueyang Xingchang Petro-Chemical is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 99% 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.

One final note, you should learn about the 2 warning signs we've spotted with Yueyang Xingchang Petro-Chemical (including 1 which is concerning) .

While Yueyang Xingchang Petro-Chemical 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.