Hubei Xiangyuan New Material Technology (SZSE:300980) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hubei Xiangyuan New Material Technology (SZSE:300980) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Hubei Xiangyuan New Material Technology, this is the formula:

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

0.019 = CN¥28m ÷ (CN¥1.6b - CN¥165m) (Based on the trailing twelve months to September 2023).

Thus, Hubei Xiangyuan New Material Technology has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Hubei Xiangyuan New Material Technology

In the above chart we have measured Hubei Xiangyuan New Material Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hubei Xiangyuan New Material Technology for free.

What Can We Tell From Hubei Xiangyuan New Material Technology's ROCE Trend?

On the surface, the trend of ROCE at Hubei Xiangyuan New Material Technology doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 1.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Hubei Xiangyuan New Material Technology has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

We're a bit apprehensive about Hubei Xiangyuan New Material Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 12% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Hubei Xiangyuan New Material Technology, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

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.