What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Liaoning Xinde New Material Technology (SZSE:301349), 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. Analysts use this formula to calculate it for Liaoning Xinde New Material Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = CN¥69m ÷ (CN¥3.1b - CN¥252m) (Based on the trailing twelve months to September 2023).
Thus, Liaoning Xinde New Material Technology has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.1%.
Above you can see how the current ROCE for Liaoning Xinde New Material Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Liaoning Xinde New Material Technology .
What Does the ROCE Trend For Liaoning Xinde New Material Technology Tell Us?
On the surface, the trend of ROCE at Liaoning Xinde New Material Technology doesn't inspire confidence. Around four years ago the returns on capital were 32%, but since then they've fallen to 2.5%. 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 may take some time before the company starts to see any change in earnings from these investments.
On a related note, Liaoning Xinde New Material Technology has decreased its current liabilities to 8.2% 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.
The Bottom Line On Liaoning Xinde New Material Technology's ROCE
To conclude, we've found that Liaoning Xinde New Material Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last year, investors may not be too optimistic on this trend improving either. 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 Liaoning Xinde New Material Technology (2 are a bit concerning) you should be aware of.
While Liaoning Xinde New Material Technology 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.