Xianheng International Science&Technology (SHSE:605056) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Xianheng International Science&Technology (SHSE:605056), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Xianheng International Science&Technology is:

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

0.15 = CN¥230m ÷ (CN¥2.4b - CN¥913m) (Based on the trailing twelve months to September 2023).

So, Xianheng International Science&Technology has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.0% it's much better.

Check out our latest analysis for Xianheng International Science&Technology

In the above chart we have measured Xianheng International Science&Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Xianheng International Science&Technology .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Xianheng International Science&Technology doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Xianheng International Science&Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xianheng International Science&Technology is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.1% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Xianheng International Science&Technology we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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. 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.