What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Xiangtan Electrochemical ScientificLtd (SZSE:002125) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Xiangtan Electrochemical ScientificLtd, this is the formula:

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

0.087 = CN¥330m ÷ (CN¥4.9b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Xiangtan Electrochemical ScientificLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiangtan Electrochemical ScientificLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xiangtan Electrochemical ScientificLtd.

The Trend Of ROCE

The returns on capital haven't changed much for Xiangtan Electrochemical ScientificLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 125% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Xiangtan Electrochemical ScientificLtd has done well to reduce current liabilities to 22% 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.

The Key Takeaway

In conclusion, Xiangtan Electrochemical ScientificLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Xiangtan Electrochemical ScientificLtd does have some risks though, and we've spotted 2 warning signs for Xiangtan Electrochemical ScientificLtd that you might be interested in.

While Xiangtan Electrochemical ScientificLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com