Returns On Capital Signal Tricky Times Ahead For Ximei Resources Holding (HKG:9936)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Ximei Resources Holding (HKG:9936), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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)

0.15 = CN¥178m ÷ (CN¥1.7b - CN¥518m) (Based on the trailing twelve months to December 2022).

Therefore, Ximei Resources Holding has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.0% it's much better.

View 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'd like to look at how Ximei Resources Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Ximei Resources Holding

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

The trend of ROCE doesn't look fantastic because it's fallen from 22% five years ago, while the business's capital employed increased by 411%. Usually this isn't ideal, but given Ximei Resources Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Ximei Resources Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Ximei Resources Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ximei Resources Holding. In light of this, the stock has only gained 2.2% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Ximei Resources Holding we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.