Returns On Capital Are Showing Encouraging Signs At Xinjiang GuannongLtd (SHSE:600251)

Simply Wall St · 10/16 02:01

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Xinjiang GuannongLtd (SHSE:600251) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Xinjiang GuannongLtd, this is the formula:

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

0.063 = CN¥274m ÷ (CN¥6.0b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

So, Xinjiang GuannongLtd has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.2% average generated by the Food industry.

View our latest analysis for Xinjiang GuannongLtd

roce
SHSE:600251 Return on Capital Employed October 16th 2024

In the above chart we have measured Xinjiang GuannongLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinjiang GuannongLtd .

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Xinjiang GuannongLtd has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Xinjiang GuannongLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Xinjiang GuannongLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Xinjiang GuannongLtd has. And with a respectable 52% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 2 warning signs with Xinjiang GuannongLtd and understanding them should be part of your investment process.

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.