Investors Could Be Concerned With 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Xinyi Electric Storage Holdings (HKG:8328), we don't think it's current trends fit the mold of a multi-bagger.

We've discovered 2 warning signs about Xinyi Electric Storage Holdings. View them for free.

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. Analysts use this formula to calculate it for Xinyi Electric Storage Holdings:

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

0.025 = HK$30m ÷ (HK$2.0b - HK$838m) (Based on the trailing twelve months to December 2024).

Thus, Xinyi Electric Storage Holdings has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.3%.

View our latest analysis for Xinyi Electric Storage Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xinyi Electric Storage Holdings.

What Can We Tell From Xinyi Electric Storage Holdings' ROCE Trend?

When we looked at the ROCE trend at Xinyi Electric Storage Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.5% from 6.1% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Xinyi Electric Storage Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Xinyi Electric Storage Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 42% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Xinyi Electric Storage Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Xinyi Electric Storage Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.