Here’s What’s Happening With Returns At Xinyi Electric Storage Holdings (HKG:8328)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at Xinyi Electric Storage Holdings (HKG:8328) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.049 = HK$19m ÷ (HK$480m - HK$81m) (Based on the trailing twelve months to September 2020).

Therefore, Xinyi Electric Storage Holdings has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.7%.

Check out 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're interested in investigating Xinyi Electric Storage Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Xinyi Electric Storage Holdings Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.9%. The amount of capital employed has increased too, by 561%. So we're very much inspired by what we're seeing at Xinyi Electric Storage Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From Xinyi Electric Storage Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Xinyi Electric Storage Holdings has. Since the stock has returned a staggering 209% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 2 warning signs for Xinyi Electric Storage Holdings you'll probably want to know about.

While Xinyi Electric Storage Holdings 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.

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