Returns On Capital At Ximei Resources Holding (HKG:9936) Paint A Concerning Picture

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. 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 Ximei Resources Holding (HKG:9936) 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)?

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. The formula for this calculation on Ximei Resources Holding is:

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

0.16 = CN¥87m ÷ (CN¥854m - CN¥300m) (Based on the trailing twelve months to December 2020).

Thus, Ximei Resources Holding has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.5% it's much better.

See our latest analysis for Ximei Resources Holding

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

What Can We Tell From Ximei Resources Holding's ROCE Trend?

On the surface, the trend of ROCE at Ximei Resources Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Ximei Resources Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 117% gain to shareholders who have held over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Ximei Resources Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

While Ximei Resources Holding 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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