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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Xinjiang Xintai Natural Gas (SHSE:603393) and its trend of ROCE, we really liked what we saw.
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 Xinjiang Xintai Natural Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥1.8b ÷ (CN¥14b - CN¥3.0b) (Based on the trailing twelve months to September 2023).
Therefore, Xinjiang Xintai Natural Gas has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 9.2% it's much better.
Above you can see how the current ROCE for Xinjiang Xintai Natural Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinjiang Xintai Natural Gas .
What Can We Tell From Xinjiang Xintai Natural Gas' ROCE Trend?
We like the trends that we're seeing from Xinjiang Xintai Natural Gas. Over the last five years, returns on capital employed have risen substantially to 16%. 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 70%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
What We Can Learn From Xinjiang Xintai Natural Gas' ROCE
To sum it up, Xinjiang Xintai Natural Gas has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 129% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
If you want to continue researching Xinjiang Xintai Natural Gas, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Xinjiang Xintai Natural Gas 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.