Xinte Energy (HKG:1799) Is Investing Its Capital With Increasing Efficiency

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at the ROCE trend of Xinte Energy (HKG:1799) we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Xinte Energy:

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

0.28 = CN¥17b ÷ (CN¥84b - CN¥24b) (Based on the trailing twelve months to June 2023).

Therefore, Xinte Energy has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Construction industry average of 6.5%.

See our latest analysis for Xinte Energy

In the above chart we have measured Xinte Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Xinte Energy.

So How Is Xinte Energy's ROCE Trending?

We like the trends that we're seeing from Xinte Energy. The data shows that returns on capital have increased substantially over the last five years to 28%. The amount of capital employed has increased too, by 239%. So we're very much inspired by what we're seeing at Xinte Energy thanks to its ability to profitably reinvest capital.

One more thing to note, Xinte Energy has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To sum it up, Xinte Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Xinte Energy does come with some risks, and we've found 1 warning sign that you should be aware of.

Xinte Energy is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.