If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Inner Mongolia Xinhua Distribution GroupLtd (SHSE:603230) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Inner Mongolia Xinhua Distribution GroupLtd, this is the formula:

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

0.07 = CN¥202m ÷ (CN¥4.5b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Inner Mongolia Xinhua Distribution GroupLtd has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Retail Distributors industry average of 5.5%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Inner Mongolia Xinhua Distribution GroupLtd.

What Does the ROCE Trend For Inner Mongolia Xinhua Distribution GroupLtd Tell Us?

In terms of Inner Mongolia Xinhua Distribution GroupLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Inner Mongolia Xinhua Distribution GroupLtd's ROCE

Long story short, while Inner Mongolia Xinhua Distribution GroupLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 11% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Inner Mongolia Xinhua Distribution GroupLtd (1 is concerning) you should be aware of.

While Inner Mongolia Xinhua Distribution GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.