Here's What To Make Of Xinyi Energy Holdings' (HKG:3868) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Xinyi Energy Holdings (HKG:3868) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Xinyi Energy Holdings:

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

0.086 = HK$1.5b ÷ (HK$22b - HK$3.5b) (Based on the trailing twelve months to June 2024).

Therefore, Xinyi Energy Holdings has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.9% generated by the Renewable Energy industry, it's much better.

See our latest analysis for Xinyi Energy Holdings

Above you can see how the current ROCE for Xinyi Energy Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Xinyi Energy Holdings .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Xinyi Energy Holdings. The company has employed 43% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. 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.

What We Can Learn From Xinyi Energy Holdings' ROCE

In conclusion, Xinyi Energy Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Xinyi Energy Holdings does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Xinyi Energy Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.