Why You Should Care About Xingfa Aluminium Holdings' (HKG:98) Strong Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Xingfa Aluminium Holdings' (HKG:98) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Xingfa Aluminium Holdings:

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

0.22 = CN¥1.1b ÷ (CN¥9.8b - CN¥5.0b) (Based on the trailing twelve months to June 2021).

Therefore, Xingfa Aluminium Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 13%.

View our latest analysis for Xingfa Aluminium Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xingfa Aluminium Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Xingfa Aluminium Holdings, check out these free graphs here.

What Does the ROCE Trend For Xingfa Aluminium Holdings Tell Us?

It's hard not to be impressed by Xingfa Aluminium Holdings' returns on capital. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 160% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Xingfa Aluminium Holdings has done well to reduce current liabilities to 51% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line On Xingfa Aluminium Holdings' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 182% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Xingfa Aluminium Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.

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