Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Xinyaqiang Silicon ChemistryLtd (SHSE:603155) 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. The formula for this calculation on Xinyaqiang Silicon ChemistryLtd is:

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

0.076 = CN¥177m ÷ (CN¥2.6b - CN¥218m) (Based on the trailing twelve months to June 2023).

So, Xinyaqiang Silicon ChemistryLtd has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.7%.

View our latest analysis for Xinyaqiang Silicon ChemistryLtd

Above you can see how the current ROCE for Xinyaqiang Silicon ChemistryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at Xinyaqiang Silicon ChemistryLtd doesn't inspire confidence. Around five years ago the returns on capital were 39%, but since then they've fallen to 7.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Xinyaqiang Silicon ChemistryLtd has done well to pay down its current liabilities to 8.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Xinyaqiang Silicon ChemistryLtd's ROCE

In summary, we're somewhat concerned by Xinyaqiang Silicon ChemistryLtd's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 11% over the last three years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Xinyaqiang Silicon ChemistryLtd that we think you should be aware of.

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.