The Returns On Capital At Xinyi Solar Holdings (HKG:968) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Xinyi Solar Holdings (HKG:968), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Xinyi Solar Holdings:

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

0.13 = HK$5.3b ÷ (HK$49b - HK$10.0b) (Based on the trailing twelve months to June 2022).

Therefore, Xinyi Solar Holdings has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Semiconductor industry.

See our latest analysis for Xinyi Solar Holdings

Above you can see how the current ROCE for Xinyi Solar Holdings 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 The Trend Of ROCE Can Tell Us

In terms of Xinyi Solar Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 13%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Xinyi Solar Holdings. And long term investors must be optimistic going forward because the stock has returned a huge 248% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Xinyi Solar Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Xinyi Solar Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.