Returns On Capital At Zhejiang XinNong ChemicalLtd (SZSE:002942) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zhejiang XinNong ChemicalLtd (SZSE:002942) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Zhejiang XinNong ChemicalLtd, this is the formula:

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

0.0064 = CN¥7.7m ÷ (CN¥1.6b - CN¥414m) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang XinNong ChemicalLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

Check out our latest analysis for Zhejiang XinNong ChemicalLtd

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 Zhejiang XinNong ChemicalLtd's past further, check out this free graph covering Zhejiang XinNong ChemicalLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhejiang XinNong ChemicalLtd doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 0.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Zhejiang XinNong ChemicalLtd's ROCE

In summary, Zhejiang XinNong ChemicalLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Zhejiang XinNong ChemicalLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.