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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shaanxi Sirui Advanced Materials (SHSE:688102) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Shaanxi Sirui Advanced Materials is:

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

0.09 = CN¥116m ÷ (CN¥1.6b - CN¥346m) (Based on the trailing twelve months to December 2023).

So, Shaanxi Sirui Advanced Materials has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 6.9% generated by the Metals and Mining industry, it's much better.

Above you can see how the current ROCE for Shaanxi Sirui Advanced Materials 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 Shaanxi Sirui Advanced Materials for free.

What Can We Tell From Shaanxi Sirui Advanced Materials' ROCE Trend?

There are better returns on capital out there than what we're seeing at Shaanxi Sirui Advanced Materials. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 286% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Shaanxi Sirui Advanced Materials has done well to reduce current liabilities to 21% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Shaanxi Sirui Advanced Materials' ROCE

Long story short, while Shaanxi Sirui Advanced Materials has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last year has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Shaanxi Sirui Advanced Materials it's worth checking out our FREE intrinsic value approximation for 688102 to see if it's trading at an attractive price in other respects.

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.