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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Xin Hwa Holdings Berhad, this is the formula:

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

0.025 = RM7.6m ÷ (RM372m - RM75m) (Based on the trailing twelve months to September 2021).

Therefore, Xin Hwa Holdings Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Transportation industry average of 4.3%.

See 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'd like to look at how Xin Hwa Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Xin Hwa Holdings Berhad's ROCE Trending?

When we looked at the ROCE trend at Xin Hwa Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

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

To conclude, we've found that Xin Hwa Holdings Berhad is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 70% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Xin Hwa Holdings Berhad, we've spotted 6 warning signs, and 2 of them are concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.