Xinjiang Daqo New EnergyLtd (SHSE:688303) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could 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. 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 Xinjiang Daqo New EnergyLtd (SHSE:688303) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Xinjiang Daqo New EnergyLtd, this is the formula:

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

0.02 = CN¥850m ÷ (CN¥48b - CN¥4.6b) (Based on the trailing twelve months to June 2024).

Therefore, Xinjiang Daqo New EnergyLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.7%.

View our latest analysis for Xinjiang Daqo New EnergyLtd

In the above chart we have measured Xinjiang Daqo New EnergyLtd'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 Xinjiang Daqo New EnergyLtd for free.

So How Is Xinjiang Daqo New EnergyLtd's ROCE Trending?

In terms of Xinjiang Daqo New EnergyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.0% from 8.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Xinjiang Daqo New EnergyLtd has decreased its current liabilities to 9.6% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Xinjiang Daqo New EnergyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. This could explain why the stock has sunk a total of 76% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Xinjiang Daqo New EnergyLtd (1 is concerning) you should be aware of.

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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.