Luzhou Xinglu Water (Group) (HKG:2281) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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 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%.

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'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.

How Are Returns Trending?

In terms of Luzhou Xinglu Water (Group)'s historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.1% for the last five years, and the capital employed within the business has risen 97% in that time. 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.

The Key Takeaway

In conclusion, Luzhou Xinglu Water (Group) has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Luzhou Xinglu Water (Group), we've discovered 3 warning signs that you should be aware of.

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.