Returns At China XLX Fertiliser (HKG:1866) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 China XLX Fertiliser's (HKG:1866) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on China XLX Fertiliser is:

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

0.15 = CN¥1.9b ÷ (CN¥23b - CN¥11b) (Based on the trailing twelve months to June 2021).

So, China XLX Fertiliser has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

View our latest analysis for China XLX Fertiliser

Above you can see how the current ROCE for China XLX Fertiliser compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For China XLX Fertiliser Tell Us?

Investors would be pleased with what's happening at China XLX Fertiliser. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 58%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On China XLX Fertiliser's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China XLX Fertiliser has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if China XLX Fertiliser can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for China XLX Fertiliser you'll probably want to know about.

While China XLX Fertiliser 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.