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

If you're looking for a multi-bagger, there's a few things to 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 Luzhou Xinglu Water (Group) (HKG:2281) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Luzhou Xinglu Water (Group):

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

0.061 = CN¥341m ÷ (CN¥7.1b - CN¥1.5b) (Based on the trailing twelve months to December 2023).

Thus, Luzhou Xinglu Water (Group) has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

See 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'd like to look at how Luzhou Xinglu Water (Group) has performed in the past in other metrics, you can view this free graph of Luzhou Xinglu Water (Group)'s past earnings, revenue and cash flow.

So How Is Luzhou Xinglu Water (Group)'s ROCE 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 6.1% and the business has deployed 97% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Luzhou Xinglu Water (Group)'s ROCE

In conclusion, Luzhou Xinglu Water (Group) has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Luzhou Xinglu Water (Group) has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Luzhou Xinglu Water (Group) you'll probably want to know about.

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.