Hangzhou Xili Intelligent TechnologyLtd's (SHSE:688616) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hangzhou Xili Intelligent TechnologyLtd (SHSE:688616) 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 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 Hangzhou Xili Intelligent TechnologyLtd is:

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

0.079 = CN¥63m ÷ (CN¥1.0b - CN¥238m) (Based on the trailing twelve months to September 2023).

So, Hangzhou Xili Intelligent TechnologyLtd has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

See our latest analysis for Hangzhou Xili Intelligent TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Xili Intelligent TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Xili Intelligent TechnologyLtd.

The Trend Of ROCE

The returns on capital haven't changed much for Hangzhou Xili Intelligent TechnologyLtd in recent years. The company has employed 125% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 23% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Hangzhou Xili Intelligent TechnologyLtd's ROCE

In conclusion, Hangzhou Xili Intelligent TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 25% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Hangzhou Xili Intelligent TechnologyLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.