To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Jiangsu Xinquan Automotive TrimLtd (SHSE:603179) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Jiangsu Xinquan Automotive TrimLtd:

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

0.16 = CN¥1.2b ÷ (CN¥15b - CN¥7.0b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Xinquan Automotive TrimLtd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

In the above chart we have measured Jiangsu Xinquan Automotive TrimLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Xinquan Automotive TrimLtd for free.

The Trend Of ROCE

The trends we've noticed at Jiangsu Xinquan Automotive TrimLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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 252%. 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.

On a side note, Jiangsu Xinquan Automotive TrimLtd's current liabilities are still rather high at 47% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's great to see that Jiangsu Xinquan Automotive TrimLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 311% 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.

One final note, you should learn about the 2 warning signs we've spotted with Jiangsu Xinquan Automotive TrimLtd (including 1 which is potentially serious) .

While Jiangsu Xinquan Automotive TrimLtd 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.