What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tianjin Pengling GroupLtd (SZSE:300375), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Tianjin Pengling GroupLtd is:

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

0.015 = CN¥36m ÷ (CN¥3.1b - CN¥799m) (Based on the trailing twelve months to September 2023).

Thus, Tianjin Pengling GroupLtd has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Pengling GroupLtd's ROCE against it's prior returns. If you're interested in investigating Tianjin Pengling GroupLtd's past further, check out this free graph covering Tianjin Pengling GroupLtd's past earnings, revenue and cash flow.

So How Is Tianjin Pengling GroupLtd's ROCE Trending?

On the surface, the trend of ROCE at Tianjin Pengling GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Tianjin Pengling GroupLtd's current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Tianjin Pengling GroupLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Tianjin Pengling GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with Tianjin Pengling GroupLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.