Investors Met With Slowing Returns on Capital At Xiangtan Electrochemical ScientificLtd (SZSE:002125)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Xiangtan Electrochemical ScientificLtd (SZSE:002125) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Xiangtan Electrochemical ScientificLtd:

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

0.10 = CN¥395m ÷ (CN¥4.8b - CN¥1.0b) (Based on the trailing twelve months to September 2024).

Therefore, Xiangtan Electrochemical ScientificLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Chemicals industry.

View our latest analysis for Xiangtan Electrochemical ScientificLtd

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

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 113% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Xiangtan Electrochemical ScientificLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 21% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Xiangtan Electrochemical ScientificLtd's ROCE

The main thing to remember is that Xiangtan Electrochemical ScientificLtd has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 46% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 1 warning sign facing Xiangtan Electrochemical ScientificLtd that you might find interesting.

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.