Investors Met With Slowing Returns on Capital At Yongxing Special Materials TechnologyLtd (SZSE:002756)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Yongxing Special Materials TechnologyLtd (SZSE:002756) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Yongxing Special Materials TechnologyLtd, this is the formula:

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

0.094 = CN¥1.2b ÷ (CN¥14b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Yongxing Special Materials TechnologyLtd has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.8% generated by the Metals and Mining industry, it's much better.

View our latest analysis for Yongxing Special Materials TechnologyLtd

Above you can see how the current ROCE for Yongxing Special Materials TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yongxing Special Materials TechnologyLtd for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Yongxing Special Materials TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 241% more capital into its operations. 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.

Our Take On Yongxing Special Materials TechnologyLtd's ROCE

In summary, Yongxing Special Materials TechnologyLtd has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 154% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with Yongxing Special Materials TechnologyLtd (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Yongxing Special Materials TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.