Returns At Xin Yuan Enterprises Group (HKG:1748) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Xin Yuan Enterprises Group (HKG:1748), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Xin Yuan Enterprises Group:

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

0.072 = US$13m ÷ (US$200m - US$21m) (Based on the trailing twelve months to June 2023).

Therefore, Xin Yuan Enterprises Group has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Shipping industry average of 11%.

See our latest analysis for Xin Yuan Enterprises Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xin Yuan Enterprises Group's ROCE against it's prior returns. If you'd like to look at how Xin Yuan Enterprises Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Xin Yuan Enterprises Group Tell Us?

Things have been pretty stable at Xin Yuan Enterprises Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Xin Yuan Enterprises Group to be a multi-bagger going forward.

In Conclusion...

In summary, Xin Yuan Enterprises Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 202% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Xin Yuan Enterprises Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Xin Yuan Enterprises Group 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.