Xingye Alloy Materials Group (HKG:505) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Xingye Alloy Materials Group (HKG:505) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Xingye Alloy Materials Group:

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

0.13 = CN¥171m ÷ (CN¥3.0b - CN¥1.6b) (Based on the trailing twelve months to December 2020).

So, Xingye Alloy Materials Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Electrical industry.

See 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 The Trend Of ROCE Can Tell Us

Xingye Alloy Materials Group has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 85% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Xingye Alloy Materials Group has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

As discussed above, Xingye Alloy Materials Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 43% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Xingye Alloy Materials Group can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Xingye Alloy Materials Group, we've discovered 1 warning sign that you should be aware of.

While Xingye Alloy Materials Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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