Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Yueyang Xingchang Petro-Chemical (SZSE:000819) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Yueyang Xingchang Petro-Chemical:

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

0.048 = CN¥123m ÷ (CN¥3.1b - CN¥540m) (Based on the trailing twelve months to March 2024).

So, Yueyang Xingchang Petro-Chemical has an ROCE of 4.8%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yueyang Xingchang Petro-Chemical's ROCE against it's prior returns. If you'd like to look at how Yueyang Xingchang Petro-Chemical has performed in the past in other metrics, you can view this free graph of Yueyang Xingchang Petro-Chemical's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 6.9% five years ago, while capital employed has grown 234%. Usually this isn't ideal, but given Yueyang Xingchang Petro-Chemical conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Yueyang Xingchang Petro-Chemical probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Yueyang Xingchang Petro-Chemical's ROCE

Bringing it all together, while we're somewhat encouraged by Yueyang Xingchang Petro-Chemical's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 116% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Yueyang Xingchang Petro-Chemical, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.

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