Returns At Suzhou Xianglou New Material (SZSE:301160) Appear To Be Weighed Down

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Suzhou Xianglou New Material's (SZSE:301160) trend of ROCE, we liked what we saw.

Understanding 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. The formula for this calculation on Suzhou Xianglou New Material is:

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

0.14 = CN¥225m ÷ (CN¥1.8b - CN¥217m) (Based on the trailing twelve months to March 2024).

Therefore, Suzhou Xianglou New Material has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Metals and Mining industry.

See our latest analysis for Suzhou Xianglou New Material

In the above chart we have measured Suzhou Xianglou New Material'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 Suzhou Xianglou New Material .

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 272% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Suzhou Xianglou New Material has done well to reduce current liabilities to 12% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Suzhou Xianglou New Material's ROCE

In the end, Suzhou Xianglou New Material has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 22% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Suzhou Xianglou New Material does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Suzhou Xianglou New Material 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.