Here's What's Concerning About Xiangxing International Holding's (HKG:1732) 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. 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 Xiangxing International Holding (HKG:1732) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Xiangxing International Holding:

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

0.13 = CN¥21m ÷ (CN¥185m - CN¥33m) (Based on the trailing twelve months to December 2021).

So, Xiangxing International Holding has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 11% it's much better.

See our latest analysis for Xiangxing International Holding

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

The Trend Of ROCE

On the surface, the trend of ROCE at Xiangxing International Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 52% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Xiangxing International Holding has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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 Xiangxing International Holding. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Xiangxing International Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Xiangxing International 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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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.