Xiangtan Electric Manufacturing (SHSE:600416) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Xiangtan Electric Manufacturing (SHSE:600416) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Xiangtan Electric Manufacturing is:

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

0.015 = CN¥128m ÷ (CN¥14b - CN¥5.7b) (Based on the trailing twelve months to September 2024).

So, Xiangtan Electric Manufacturing has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

View our latest analysis for Xiangtan Electric Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiangtan Electric Manufacturing's ROCE against it's prior returns. If you'd like to look at how Xiangtan Electric Manufacturing has performed in the past in other metrics, you can view this free graph of Xiangtan Electric Manufacturing's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Xiangtan Electric Manufacturing is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. Not only that, but the company is utilizing 76% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 40%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Xiangtan Electric Manufacturing has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Xiangtan Electric Manufacturing has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 90% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Xiangtan Electric Manufacturing that you might find interesting.

While Xiangtan Electric Manufacturing 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.