Investors Could Be Concerned With Xinyi Glass Holdings' (HKG:868) 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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Xinyi Glass Holdings (HKG:868), it didn't seem to tick all of these boxes.

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. To calculate this metric for Xinyi Glass Holdings, this is the formula:

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

0.097 = HK$3.7b ÷ (HK$52b - HK$13b) (Based on the trailing twelve months to June 2023).

Therefore, Xinyi Glass Holdings has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Building industry average of 9.2%.

See our latest analysis for Xinyi Glass Holdings

In the above chart we have measured Xinyi Glass Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Xinyi Glass Holdings.

How Are Returns Trending?

When we looked at the ROCE trend at Xinyi Glass Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Xinyi Glass Holdings' ROCE

In summary, we're somewhat concerned by Xinyi Glass Holdings' diminishing returns on increasing amounts of capital. However the stock has delivered a 62% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 3 warning signs for Xinyi Glass Holdings you'll probably want to know about.

While Xinyi Glass 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.