There Are Reasons To Feel Uneasy About Xinjiang Lixin Energy's (SZSE:001258) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Xinjiang Lixin Energy (SZSE:001258), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Xinjiang Lixin Energy is:

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

0.035 = CN¥301m ÷ (CN¥9.9b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Xinjiang Lixin Energy has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.9%.

See our latest analysis for Xinjiang Lixin Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinjiang Lixin Energy's ROCE against it's prior returns. If you'd like to look at how Xinjiang Lixin Energy has performed in the past in other metrics, you can view this free graph of Xinjiang Lixin Energy's past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 6.9% five years ago, while the business's capital employed increased by 103%. That being said, Xinjiang Lixin Energy raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Xinjiang Lixin Energy might not have received a full period of earnings contribution from it.

In Conclusion...

In summary, Xinjiang Lixin Energy is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Xinjiang Lixin Energy we've found 3 warning signs (1 is 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.

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