Returns At Xinyi Electric Storage Holdings (HKG:8328) Are On The Way Up

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Xinyi Electric Storage Holdings (HKG:8328) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Xinyi Electric Storage Holdings is:

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

0.076 = HK$109m ÷ (HK$2.3b - HK$907m) (Based on the trailing twelve months to December 2023).

Thus, Xinyi Electric Storage Holdings has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Electrical industry average of 7.0%.

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'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 Xinyi Electric Storage Holdings' 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 7.6%. The amount of capital employed has increased too, by 278%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 39% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Xinyi Electric Storage Holdings' ROCE

In summary, it's great to see that Xinyi Electric Storage Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 8328 on our platform that is definitely worth checking out.

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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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.

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