Here's What To Make Of Luzhou Xinglu Water (Group)'s (HKG:2281) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Luzhou Xinglu Water (Group) (HKG:2281), it didn't seem to tick all of these boxes.

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. To calculate this metric for Luzhou Xinglu Water (Group), this is the formula:

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

0.071 = CN¥404m ÷ (CN¥7.2b - CN¥1.6b) (Based on the trailing twelve months to June 2022).

So, Luzhou Xinglu Water (Group) has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.0% average generated by the Water Utilities industry.

Check out our latest analysis for Luzhou Xinglu Water (Group)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Luzhou Xinglu Water (Group)'s ROCE against it's prior returns. If you're interested in investigating Luzhou Xinglu Water (Group)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Luzhou Xinglu Water (Group) in recent years. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 138% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, Luzhou Xinglu Water (Group)'s returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Luzhou Xinglu Water (Group) (including 1 which is potentially serious) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.