Returns On Capital At Xinyi Glass Holdings (HKG:868) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Xinyi Glass Holdings (HKG:868) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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%. On its own, that's a low figure but it's around the 9.2% average generated by the Building industry.

Check out 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, you can check out the forecasts from the analysts covering Xinyi Glass Holdings here for free.

So How Is Xinyi Glass Holdings' ROCE Trending?

When we looked at the ROCE trend at Xinyi Glass Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.7%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Xinyi Glass Holdings' ROCE

In summary, we're somewhat concerned by Xinyi Glass Holdings' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Xinyi Glass Holdings, we've discovered 3 warning signs that you should be aware of.

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.