Xinjiang Daqo New EnergyLtd's (SHSE:688303) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Xinjiang Daqo New EnergyLtd (SHSE:688303), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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)

0.0026 = CN¥111m ÷ (CN¥47b - CN¥4.3b) (Based on the trailing twelve months to September 2024).

Thus, Xinjiang Daqo New EnergyLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.8%.

Check out 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.

The Trend Of ROCE

When we looked at the ROCE trend at Xinjiang Daqo New EnergyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. 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 9.3% of total assets. So we could link some of this to the decrease in ROCE. 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 Key Takeaway

We're a bit apprehensive about Xinjiang Daqo New EnergyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 53% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Xinjiang Daqo New EnergyLtd does have some risks though, and we've spotted 2 warning signs for Xinjiang Daqo New EnergyLtd that you might be interested in.

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.