What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over Xinyi Solar Holdings’ (HKG:968) trend of ROCE, we liked what we saw.
What is 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. Analysts use this formula to calculate it for Xinyi Solar Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = HK$4.0b ÷ (HK$30b – HK$6.2b) (Based on the trailing twelve months to June 2020).
Thus, Xinyi Solar Holdings has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 7.6% generated by the Semiconductor industry.
Above you can see how the current ROCE for Xinyi Solar Holdings 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.
So How Is Xinyi Solar Holdings’ ROCE Trending?
While the current returns on capital are decent, they haven’t changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 273% in that time. Since 16% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
To sum it up, Xinyi Solar Holdings has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 322% return they’ve received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you’d like to know about the risks facing Xinyi Solar Holdings, we’ve discovered 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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