Xingda International Holdings (HKG:1899) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So on that note, Xingda International Holdings (HKG:1899) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Xingda International Holdings, this is the formula:

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

0.086 = CN¥758m ÷ (CN¥21b - CN¥12b) (Based on the trailing twelve months to June 2023).

So, Xingda International Holdings has an ROCE of 8.6%. On its own, that's a low figure but it's around the 7.5% average generated by the Auto Components industry.

Check out our latest analysis for Xingda International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xingda International Holdings' ROCE against it's prior returns. If you're interested in investigating Xingda International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Xingda International Holdings Tell Us?

Xingda International Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 120% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Xingda International Holdings' ROCE

In summary, we're delighted to see that Xingda International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.0% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 4 warning signs with Xingda International Holdings and understanding them should be part of your investment process.

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.