If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Ning Xia Yin Xing EnergyLtd (SZSE:000862) 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. Analysts use this formula to calculate it for Ning Xia Yin Xing EnergyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥341m ÷ (CN¥9.9b - CN¥3.1b) (Based on the trailing twelve months to September 2023).
Therefore, Ning Xia Yin Xing EnergyLtd has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.6% average generated by the Renewable Energy industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ning Xia Yin Xing EnergyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ning Xia Yin Xing EnergyLtd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Ning Xia Yin Xing EnergyLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Ning Xia Yin Xing EnergyLtd to be a multi-bagger going forward.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 31% of total assets, this reported ROCE would probably be less than5.0% because total capital employed would be higher.The 5.0% ROCE could be even lower if current liabilities weren't 31% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
Our Take On Ning Xia Yin Xing EnergyLtd's ROCE
In a nutshell, Ning Xia Yin Xing EnergyLtd has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Ning Xia Yin Xing EnergyLtd has the makings of a multi-bagger.
If you'd like to know more about Ning Xia Yin Xing EnergyLtd, we've spotted 2 warning signs, and 1 of them is 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.
