What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Xinxiang Chemical Fiber (SZSE:000949) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Xinxiang Chemical Fiber:

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

0.038 = CN¥360m ÷ (CN¥13b - CN¥3.8b) (Based on the trailing twelve months to September 2024).

Therefore, Xinxiang Chemical Fiber has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Above you can see how the current ROCE for Xinxiang Chemical Fiber compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Xinxiang Chemical Fiber for free.

So How Is Xinxiang Chemical Fiber's ROCE Trending?

We weren't thrilled with the trend because Xinxiang Chemical Fiber's ROCE has reduced by 25% over the last five years, while the business employed 57% more capital. That being said, Xinxiang Chemical Fiber raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Xinxiang Chemical Fiber 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.

The Bottom Line

To conclude, we've found that Xinxiang Chemical Fiber is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Xinxiang Chemical Fiber does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.