What Do The Returns On Capital At Xingye Alloy Materials Group (HKG:505) Tell Us?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Xingye Alloy Materials Group (HKG:505) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Xingye Alloy Materials Group:

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

0.093 = CN¥115m ÷ (CN¥2.6b - CN¥1.4b) (Based on the trailing twelve months to June 2020).

Therefore, Xingye Alloy Materials Group has an ROCE of 9.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.9%.

View our latest analysis for Xingye Alloy Materials Group

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

What Does the ROCE Trend For Xingye Alloy Materials Group Tell Us?

Over the past five years, Xingye Alloy Materials Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Xingye Alloy Materials Group to be a multi-bagger going forward.

Another thing to note, Xingye Alloy Materials Group has a high ratio of current liabilities to total assets of 53%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Xingye Alloy Materials Group's ROCE

In summary, Xingye Alloy Materials Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 9.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Xingye Alloy Materials Group does have some risks though, and we've spotted 2 warning signs for Xingye Alloy Materials Group that you might be interested in.

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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