The Returns On Capital At Hubei Xiangyuan New Material Technology (SZSE:300980) Don't Inspire Confidence

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hubei Xiangyuan New Material Technology (SZSE:300980), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Hubei Xiangyuan New Material Technology:

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

0.023 = CN¥32m ÷ (CN¥1.6b - CN¥127m) (Based on the trailing twelve months to September 2024).

So, Hubei Xiangyuan New Material Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Hubei Xiangyuan New Material Technology .

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

In terms of Hubei Xiangyuan New Material Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Hubei Xiangyuan New Material Technology has done well to pay down its current liabilities to 8.2% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hubei Xiangyuan New Material Technology. In light of this, the stock has only gained 21% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Hubei Xiangyuan New Material Technology does come with some risks, and we've found 4 warning signs that you should be aware of.

While Hubei Xiangyuan New Material Technology 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.