Investors Could Be Concerned With Xin Hwa Holdings Berhad's (KLSE:XINHWA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Xin Hwa Holdings Berhad (KLSE:XINHWA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Xin Hwa Holdings Berhad is:

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

0.023 = RM6.9m ÷ (RM369m - RM65m) (Based on the trailing twelve months to March 2021).

Therefore, Xin Hwa Holdings Berhad has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Transportation industry average of 6.3%.

View our latest analysis for Xin Hwa Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xin Hwa Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Xin Hwa Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Xin Hwa Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.3% from 9.7% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Xin Hwa Holdings Berhad's ROCE

In summary, we're somewhat concerned by Xin Hwa Holdings Berhad's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Xin Hwa Holdings Berhad (including 2 which are significant) .

While Xin Hwa Holdings Berhad 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. 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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