Luzhou Xinglu Water (Group) (HKG:2281) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Luzhou Xinglu Water (Group) (HKG:2281) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Luzhou Xinglu Water (Group) is:

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

0.056 = CN¥292m ÷ (CN¥7.2b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

So, Luzhou Xinglu Water (Group) has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.3%.

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 past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Luzhou Xinglu Water (Group), we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Luzhou Xinglu Water (Group)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Luzhou Xinglu Water (Group). These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Luzhou Xinglu Water (Group) does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Luzhou Xinglu Water (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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