Returns On Capital At Xinxiang Chemical Fiber (SZSE:000949) Paint A Concerning Picture

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Xinxiang Chemical Fiber (SZSE:000949) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Xinxiang Chemical Fiber, this is the formula:

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

0.038 = CN¥360m ÷ (CN¥13b - CN¥3.8b) (Based on the trailing twelve months to September 2024).

Therefore, Xinxiang Chemical Fiber has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

View our latest analysis for Xinxiang Chemical Fiber

Above you can see how the current ROCE for Xinxiang Chemical Fiber compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinxiang Chemical Fiber .

So How Is Xinxiang Chemical Fiber's ROCE Trending?

We weren't thrilled with the trend because Xinxiang Chemical Fiber's ROCE has reduced by 25% over the last five years, while the business employed 57% more capital. That being said, Xinxiang Chemical Fiber raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Xinxiang Chemical Fiber might not have received a full period of earnings contribution from it.

The Bottom Line On Xinxiang Chemical Fiber's ROCE

To conclude, we've found that Xinxiang Chemical Fiber is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 2 warning signs for Xinxiang Chemical Fiber (1 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.