Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at WINBO-Dongjian Automotive Technology (SZSE:300978) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on WINBO-Dongjian Automotive Technology is:

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

0.066 = CN¥122m ÷ (CN¥2.8b - CN¥952m) (Based on the trailing twelve months to September 2023).

So, WINBO-Dongjian Automotive Technology has an ROCE of 6.6%. On its own, that's a low figure but it's around the 5.8% average generated by the Auto Components industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for WINBO-Dongjian Automotive Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of WINBO-Dongjian Automotive Technology, check out these free graphs here.

The Trend Of ROCE

In terms of WINBO-Dongjian Automotive Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, WINBO-Dongjian Automotive Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last year. Therefore based on the analysis done in this article, we don't think WINBO-Dongjian Automotive Technology has the makings of a multi-bagger.

WINBO-Dongjian Automotive Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...

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.