What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Xiangyang Changyuandonggu Industry (SHSE:603950), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Xiangyang Changyuandonggu Industry:

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

0.071 = CN¥240m ÷ (CN¥4.3b - CN¥923m) (Based on the trailing twelve months to December 2023).

So, Xiangyang Changyuandonggu Industry has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiangyang Changyuandonggu Industry's ROCE against it's prior returns. If you'd like to look at how Xiangyang Changyuandonggu Industry has performed in the past in other metrics, you can view this free graph of Xiangyang Changyuandonggu Industry's past earnings, revenue and cash flow.

What Does the ROCE Trend For Xiangyang Changyuandonggu Industry Tell Us?

When we looked at the ROCE trend at Xiangyang Changyuandonggu Industry, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Xiangyang Changyuandonggu Industry has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Xiangyang Changyuandonggu Industry. And the stock has followed suit returning a meaningful 27% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Xiangyang Changyuandonggu Industry, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.

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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.