Inner Mongolia Xinhua Distribution GroupLtd (SHSE:603230) Hasn't Managed To Accelerate Its Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Inner Mongolia Xinhua Distribution GroupLtd (SHSE:603230) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Inner Mongolia Xinhua Distribution GroupLtd is:

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

0.07 = CN¥202m ÷ (CN¥4.5b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Inner Mongolia Xinhua Distribution GroupLtd has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Retail Distributors industry, it's much better.

See our latest analysis for Inner Mongolia Xinhua Distribution GroupLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Inner Mongolia Xinhua Distribution GroupLtd has performed in the past in other metrics, you can view this free graph of Inner Mongolia Xinhua Distribution GroupLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Inner Mongolia Xinhua Distribution GroupLtd. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 70% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Inner Mongolia Xinhua Distribution GroupLtd's ROCE

Long story short, while Inner Mongolia Xinhua Distribution GroupLtd has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 26% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 3 warning signs facing Inner Mongolia Xinhua Distribution GroupLtd that you might find interesting.

While Inner Mongolia Xinhua Distribution GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.