Returns On Capital At Xiamen Xiangyu (SHSE:600057) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Xiamen Xiangyu (SHSE:600057) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Xiamen Xiangyu:

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

0.069 = CN¥3.1b ÷ (CN¥127b - CN¥82b) (Based on the trailing twelve months to September 2023).

Therefore, Xiamen Xiangyu has an ROCE of 6.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

See our latest analysis for Xiamen Xiangyu

Above you can see how the current ROCE for Xiamen Xiangyu compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Xiamen Xiangyu for free.

What Can We Tell From Xiamen Xiangyu's ROCE Trend?

In terms of Xiamen Xiangyu's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.9% from 8.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Xiamen Xiangyu's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Xiamen Xiangyu's ROCE

In summary, Xiamen Xiangyu is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 69% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Xiamen Xiangyu does come with some risks, and we've found 3 warning signs that you should be aware of.

While Xiamen Xiangyu isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.