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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Xiamen R&T Plumbing TechnologyLtd (SZSE:002790) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Xiamen R&T Plumbing TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.099 = CN¥220m ÷ (CN¥2.7b – CN¥516m) (Based on the trailing twelve months to March 2024).
Therefore, Xiamen R&T Plumbing TechnologyLtd has an ROCE of 9.9%. In absolute terms, that’s a low return, but it’s much better than the Building industry average of 7.8%.
Check out our latest analysis for Xiamen R&T Plumbing TechnologyLtd
Above you can see how the current ROCE for Xiamen R&T Plumbing TechnologyLtd 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 Xiamen R&T Plumbing TechnologyLtd for free.
What The Trend Of ROCE Can Tell Us
The returns on capital haven’t changed much for Xiamen R&T Plumbing TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 40% 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.
The Bottom Line
As we’ve seen above, Xiamen R&T Plumbing TechnologyLtd’s returns on capital haven’t increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 90% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
Like most companies, Xiamen R&T Plumbing TechnologyLtd does come with some risks, and we’ve found 1 warning sign that 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Xiamen R&T Plumbing TechnologyLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
