What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Xinyi Energy Holdings (HKG:3868), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Xinyi Energy Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = HK$1.5b ÷ (HK$22b - HK$3.5b) (Based on the trailing twelve months to June 2024).
So, Xinyi Energy Holdings has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.9% generated by the Renewable Energy industry, it's much better.
See 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're interested, you can view the analysts predictions in our free analyst report for Xinyi Energy Holdings .
What The Trend Of ROCE Can Tell Us
In terms of Xinyi Energy Holdings' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.6% and the business has deployed 43% more capital into its operations. 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.
In Conclusion...
As we've seen above, Xinyi Energy Holdings' returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 55% 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.
Xinyi Energy Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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.