Investors Met With Slowing Returns on Capital At Xinyi Energy Holdings (HKG:3868)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Xinyi Energy Holdings (HKG:3868), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.098 = HK$1.7b ÷ (HK$21b - HK$4.2b) (Based on the trailing twelve months to December 2023).

So, Xinyi Energy Holdings has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 7.0% generated by the Renewable Energy industry, it's much better.

View our latest analysis for Xinyi Energy Holdings

In the above chart we have measured Xinyi Energy Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Xinyi Energy Holdings for free.

So How Is Xinyi Energy Holdings' ROCE Trending?

The returns on capital haven't changed much for Xinyi Energy Holdings in recent years. The company has employed 120% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. 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 summary, Xinyi Energy Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. Therefore based on the analysis done in this article, we don't think Xinyi Energy Holdings has the makings of a multi-bagger.

If you'd like to know more about Xinyi Energy Holdings, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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