Xinyi Energy Holdings' (HKG:3868) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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 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. To calculate this metric for Xinyi Energy Holdings, this is the formula:

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).

Thus, Xinyi Energy Holdings has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.9%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinyi Energy Holdings .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Xinyi Energy Holdings. 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.

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. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Xinyi Energy Holdings does have some risks though, and we've spotted 3 warning signs for Xinyi Energy Holdings that you might be interested in.

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.

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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.