What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Shaanxi Sirui Advanced Materials (SHSE:688102) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Shaanxi Sirui Advanced Materials, this is the formula:

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

0.087 = CN¥126m ÷ (CN¥1.9b - CN¥463m) (Based on the trailing twelve months to June 2024).

Thus, Shaanxi Sirui Advanced Materials has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 6.8% generated by the Metals and Mining industry, it's much better.

In the above chart we have measured Shaanxi Sirui Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shaanxi Sirui Advanced Materials .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Shaanxi Sirui Advanced Materials in recent years. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 253% in that time. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 24% of total assets, is good to see from a business owner's perspective. 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 Shaanxi Sirui Advanced Materials' ROCE

In summary, Shaanxi Sirui Advanced Materials has simply been reinvesting capital and generating the same low rate of return as before. And in the last year, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Shaanxi Sirui Advanced Materials, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Shaanxi Sirui Advanced Materials 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.