There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Xin Yuan Enterprises Group (HKG:1748) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Xin Yuan Enterprises Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$14m ÷ (US$181m - US$12m) (Based on the trailing twelve months to June 2024).
Therefore, Xin Yuan Enterprises Group has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Shipping industry average of 7.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Xin Yuan Enterprises Group's ROCE against it's prior returns. If you're interested in investigating Xin Yuan Enterprises Group's past further, check out this free graph covering Xin Yuan Enterprises Group's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Xin Yuan Enterprises Group is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 130% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
In summary, we're delighted to see that Xin Yuan Enterprises Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 1,279% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Xin Yuan Enterprises Group does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
While Xin Yuan Enterprises Group 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.
