What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Wanxiang QianchaoLtd's (SZSE:000559) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wanxiang QianchaoLtd:

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

0.099 = CN¥1.1b ÷ (CN¥22b - CN¥11b) (Based on the trailing twelve months to September 2024).

So, Wanxiang QianchaoLtd has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

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

What Does the ROCE Trend For Wanxiang QianchaoLtd Tell Us?

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 9.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. So we're very much inspired by what we're seeing at Wanxiang QianchaoLtd thanks to its ability to profitably reinvest capital.

On a side note, Wanxiang QianchaoLtd's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Wanxiang QianchaoLtd's ROCE

All in all, it's terrific to see that Wanxiang QianchaoLtd is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Wanxiang QianchaoLtd does have some risks though, and we've spotted 1 warning sign for Wanxiang QianchaoLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.