Investors Could Be Concerned With Xinyi Solar Holdings' (HKG:968) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at Xinyi Solar Holdings (HKG:968) and its ROCE trend, we weren't exactly thrilled.

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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 Xinyi Solar Holdings is:

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

0.061 = CN¥2.5b ÷ (CN¥57b - CN¥15b) (Based on the trailing twelve months to December 2024).

Thus, Xinyi Solar Holdings has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.3%.

View our latest analysis for Xinyi Solar Holdings

In the above chart we have measured Xinyi Solar Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinyi Solar Holdings .

So How Is Xinyi Solar Holdings' ROCE Trending?

When we looked at the ROCE trend at Xinyi Solar Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.1% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Xinyi Solar Holdings' ROCE

In summary, Xinyi Solar Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Xinyi Solar Holdings has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Xinyi Solar Holdings that you might find interesting.

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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.