If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Xiangyang Changyuandonggu Industry (SHSE:603950), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Xiangyang Changyuandonggu Industry is:

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

0.056 = CN¥205m ÷ (CN¥5.0b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

Thus, Xiangyang Changyuandonggu Industry has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.9%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Xiangyang Changyuandonggu Industry's past further, check out this free graph covering Xiangyang Changyuandonggu Industry's past earnings, revenue and cash flow.

What Can We Tell From Xiangyang Changyuandonggu Industry's ROCE Trend?

When we looked at the ROCE trend at Xiangyang Changyuandonggu Industry, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.6%. 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.

The Bottom Line On Xiangyang Changyuandonggu Industry's ROCE

While returns have fallen for Xiangyang Changyuandonggu Industry in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 28% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Xiangyang Changyuandonggu Industry we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.