Xinyi Electric Storage Holdings (HKG:8328) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.084 = HK$114m ÷ (HK$2.2b - HK$811m) (Based on the trailing twelve months to June 2024).

Thus, Xinyi Electric Storage Holdings has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 6.3% generated by the Electrical industry, it's much better.

See 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?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.4%. The amount of capital employed has increased too, by 249%. So we're very much inspired by what we're seeing at Xinyi Electric Storage Holdings thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 37% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Xinyi Electric Storage Holdings' ROCE

All in all, it's terrific to see that Xinyi Electric Storage Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 28% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Xinyi Electric Storage Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.