Here's What's Concerning About Xinyi Electric Storage Holdings' (HKG:8328) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Xinyi Electric Storage Holdings (HKG:8328), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Xinyi Electric Storage Holdings, this is the formula:

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

0.055 = HK$72m ÷ (HK$2.3b - HK$996m) (Based on the trailing twelve months to December 2022).

So, Xinyi Electric Storage Holdings has an ROCE of 5.5%. On its own, that's a low figure but it's around the 6.0% average generated by the Electrical industry.

View our latest analysis for Xinyi Electric Storage Holdings

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

SWOT Analysis for Xinyi Electric Storage Holdings

The Trend Of ROCE

When we looked at the ROCE trend at Xinyi Electric Storage Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Xinyi Electric Storage Holdings has a high ratio of current liabilities to total assets of 43%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Xinyi Electric Storage Holdings' ROCE

While returns have fallen for Xinyi Electric Storage Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 50% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 3 warning signs we've spotted with Xinyi Electric Storage Holdings (including 1 which is potentially serious) .

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.