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. 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 Xinyaqiang Silicon ChemistryLtd (SHSE:603155), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Xinyaqiang Silicon ChemistryLtd is:

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

0.026 = CN¥65m ÷ (CN¥2.6b - CN¥170m) (Based on the trailing twelve months to September 2024).

Therefore, Xinyaqiang Silicon ChemistryLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.4%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Xinyaqiang Silicon ChemistryLtd has performed in the past in other metrics, you can view this free graph of Xinyaqiang Silicon ChemistryLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Xinyaqiang Silicon ChemistryLtd doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 2.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Xinyaqiang Silicon ChemistryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Xinyaqiang Silicon ChemistryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 51% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Xinyaqiang Silicon ChemistryLtd (2 make us uncomfortable) you should be aware of.

While Xinyaqiang Silicon ChemistryLtd 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.