Returns At Xiamen R&T Plumbing TechnologyLtd (SZSE:002790) Appear To Be Weighed Down

If we want to find a stock that could compound over the long term, what underlying trends should we look for? Among other things, we want to see two things; Firstly, an increasing return on capital employed (ROCE) and secondly, an expansion of the company's capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the company and generating higher returns. With this in mind, we looked at it Xiamen R&T Plumbing Technology Ltd (SZSE:002790) and its ROCE trend, we weren't exactly thrilled.

Return on Capital Employed (ROCE): What is it?

If you've never worked with ROCE before, it measures the “return” (profit before taxes) that a company generates from the capital employed in its business. The formula for this calculation for Xiamen R&T Plumbing TechnologyLtd is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.099 = CN¥220 million ÷ (CN¥2.7 billion – CN¥516 million) (Based on trailing twelve months ended March 2024).

Therefore, Xiamen R&T Plumbing TechnologyLtd has an ROCE of 9.9%. In absolute terms, this is a low return, but it is well above the construction industry average of 7.8%.

Check out our latest analysis for Xiamen R&T Plumbing TechnologyLtd

SZSE:002790 Return on Capital Employed May 9, 2024

Above you can see how Xiamen R&T Plumbing TechnologyLtd's current ROCE compares to its past returns on capital, but there's only so much you can tell from the past. If you want, you can check out analyst forecasts for Xiamen R&T Plumbing TechnologyLtd free.

What the ROCE trend can tell us

Returns on capital have barely changed for Xiamen R&T Plumbing TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively constant at around 9.9%, and the company has invested 40% more capital in its operations. This poor ROCE does not inspire confidence at the moment and given the increase in capital employed, it is obvious that the company is not investing funds in high-yield investments.

The conclusion

As we saw above, Xiamen R&T Plumbing TechnologyLtd's ROE has not increased, but the company is reinvesting in the company. Although the market should expect these trends to improve as the stock has gained 90% in the last five years. But if the evolution of these underlying trends continues, the likelihood of it becoming a multi-bagger from now on is not high, in our opinion.

Like most companies, Xiamen R&T Plumbing TechnologyLtd has some risks and we have discovered that 1 warning sign what you should be aware of.

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Assessment is complex, but we help make it simple.

Find out whether Xiamen R&T Plumbing TechnologyLtd may be overvalued or undervalued by checking out our comprehensive analysis Fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.

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