There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Suzhou Xingye Materials TechnologyLtd (SHSE:603928) 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)
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. Analysts use this formula to calculate it for Suzhou Xingye Materials TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = CN¥114m ÷ (CN¥1.9b - CN¥330m) (Based on the trailing twelve months to September 2023).
Therefore, Suzhou Xingye Materials TechnologyLtd has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 6.0% 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 Suzhou Xingye Materials TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Suzhou Xingye Materials TechnologyLtd has performed in the past in other metrics, you can view this free graph of Suzhou Xingye Materials TechnologyLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Suzhou Xingye Materials TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Suzhou Xingye Materials TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing to note, we've identified 1 warning sign with Suzhou Xingye Materials TechnologyLtd and understanding it should be part of your investment process.
While Suzhou Xingye Materials TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
