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Xinyi Energy Holdings Limited (HKG:3868) Is Employing Capital Very Effectively

Simply Wall St
·4-min read

Today we are going to look at Xinyi Energy Holdings Limited (HKG:3868) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Xinyi Energy Holdings:

0.097 = HK$1.2b ÷ (HK$15b - HK$2.9b) (Based on the trailing twelve months to December 2019.)

So, Xinyi Energy Holdings has an ROCE of 9.7%.

View our latest analysis for Xinyi Energy Holdings

Is Xinyi Energy Holdings's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Xinyi Energy Holdings's ROCE is meaningfully better than the 7.0% average in the Renewable Energy industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Xinyi Energy Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Xinyi Energy Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:3868 Past Revenue and Net Income April 24th 2020
SEHK:3868 Past Revenue and Net Income April 24th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Xinyi Energy Holdings.

Xinyi Energy Holdings's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Xinyi Energy Holdings has total assets of HK$15b and current liabilities of HK$2.9b. Therefore its current liabilities are equivalent to approximately 19% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Xinyi Energy Holdings's ROCE

This is good to see, and with a sound ROCE, Xinyi Energy Holdings could be worth a closer look. Xinyi Energy Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.