Xiangtan Electrochemical ScientificLtd's (SZSE:002125) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Xiangtan Electrochemical ScientificLtd (SZSE:002125), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.087 = CN¥330m ÷ (CN¥4.9b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Xiangtan Electrochemical ScientificLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

See our latest analysis for Xiangtan Electrochemical ScientificLtd

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'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.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Xiangtan Electrochemical ScientificLtd. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 125% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% 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.

In Conclusion...

In summary, Xiangtan Electrochemical ScientificLtd has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 58% 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.

Like most companies, Xiangtan Electrochemical ScientificLtd does come with some risks, and we've found 2 warning signs that 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.

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.

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