Capital Allocation Trends At Xizi Clean Energy Equipment Manufacturing (SZSE:002534) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Xizi Clean Energy Equipment Manufacturing (SZSE:002534), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Xizi Clean Energy Equipment Manufacturing is:

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

0.043 = CN¥305m ÷ (CN¥15b - CN¥8.3b) (Based on the trailing twelve months to September 2024).

Thus, Xizi Clean Energy Equipment Manufacturing has an ROCE of 4.3%. On its own, that's a low figure but it's around the 5.2% average generated by the Machinery industry.

See our latest analysis for Xizi Clean Energy Equipment Manufacturing

In the above chart we have measured Xizi Clean Energy Equipment Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xizi Clean Energy Equipment Manufacturing .

The Trend Of ROCE

In terms of Xizi Clean Energy Equipment Manufacturing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Xizi Clean Energy Equipment Manufacturing has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Xizi Clean Energy Equipment Manufacturing's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Xizi Clean Energy Equipment Manufacturing does have some risks though, and we've spotted 1 warning sign for Xizi Clean Energy Equipment Manufacturing that you might be interested in.

While Xizi Clean Energy Equipment Manufacturing may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.