Xinjiang Tianye Water Saving Irrigation System (HKG:840) Is Experiencing Growth In Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Xinjiang Tianye Water Saving Irrigation System's (HKG:840) returns on capital, so let's have a look.

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

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. The formula for this calculation on Xinjiang Tianye Water Saving Irrigation System is:

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

0.012 = CN¥6.8m ÷ (CN¥1.4b - CN¥833m) (Based on the trailing twelve months to June 2024).

So, Xinjiang Tianye Water Saving Irrigation System has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.0%.

Check out our latest analysis for Xinjiang Tianye Water Saving Irrigation System

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinjiang Tianye Water Saving Irrigation System's ROCE against it's prior returns. If you're interested in investigating Xinjiang Tianye Water Saving Irrigation System's past further, check out this free graph covering Xinjiang Tianye Water Saving Irrigation System's past earnings, revenue and cash flow.

What Does the ROCE Trend For Xinjiang Tianye Water Saving Irrigation System Tell Us?

Shareholders will be relieved that Xinjiang Tianye Water Saving Irrigation System has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 59% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Xinjiang Tianye Water Saving Irrigation System's ROCE

As discussed above, Xinjiang Tianye Water Saving Irrigation System appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Xinjiang Tianye Water Saving Irrigation System, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Xinjiang Tianye Water Saving Irrigation System 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.