Xin Yuan Enterprises Group (HKG:1748) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

Understanding Return On Capital Employed (ROCE)

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$213m - US$31m) (Based on the trailing twelve months to December 2020).

Therefore, Xin Yuan Enterprises Group has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 9.1%.

Check out 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're interested in investigating Xin Yuan Enterprises Group's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Xin Yuan Enterprises Group doesn't inspire confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. 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.

On a side note, Xin Yuan Enterprises Group has done well to pay down its current liabilities to 15% 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.

Our Take On Xin Yuan Enterprises Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xin Yuan Enterprises Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 63% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 3 warning signs facing Xin Yuan Enterprises Group that you might find interesting.

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. 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.
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