Xinjiang Tianye Water Saving Irrigation System (HKG:840) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. 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 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. Analysts use this formula to calculate it for Xinjiang Tianye Water Saving Irrigation System:

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

0.014 = CN¥8.6m ÷ (CN¥947m - CN¥354m) (Based on the trailing twelve months to December 2020).

Therefore, Xinjiang Tianye Water Saving Irrigation System has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.4%.

See 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 want to delve into the historical earnings, revenue and cash flow of Xinjiang Tianye Water Saving Irrigation System, check out these free graphs here.

How Are Returns Trending?

Xinjiang Tianye Water Saving Irrigation System has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.4% 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take 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 66% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Xinjiang Tianye Water Saving Irrigation System does have some risks though, and we've spotted 2 warning signs for Xinjiang Tianye Water Saving Irrigation System that you might be interested in.

While Xinjiang Tianye Water Saving Irrigation System 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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