We're Watching These Trends At Xin Hwa Holdings Berhad (KLSE:XINHWA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Xin Hwa Holdings Berhad (KLSE:XINHWA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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)

0.014 = RM4.2m ÷ (RM349m - RM44m) (Based on the trailing twelve months to December 2020).

Thus, Xin Hwa Holdings Berhad has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 5.7%.

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 want to delve into the historical earnings, revenue and cash flow of Xin Hwa Holdings Berhad, check out these free graphs here.

What Can We Tell From Xin Hwa Holdings Berhad's ROCE Trend?

On the surface, the trend of ROCE at Xin Hwa Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Key Takeaway

In summary, we're somewhat concerned by Xin Hwa Holdings Berhad's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 51% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Xin Hwa Holdings Berhad (of which 2 make us uncomfortable!) that you should know about.

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. 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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