What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Xuelong GroupLtd (SHSE:603949) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Xuelong GroupLtd:

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

0.053 = CN¥54m ÷ (CN¥1.1b - CN¥46m) (Based on the trailing twelve months to June 2024).

So, Xuelong GroupLtd has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.2%.

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'd like to look at how Xuelong GroupLtd has performed in the past in other metrics, you can view this free graph of Xuelong GroupLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Xuelong GroupLtd Tell Us?

In terms of Xuelong GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 29%, but since then they've fallen to 5.3%. 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.

Our Take On Xuelong GroupLtd's ROCE

While returns have fallen for Xuelong GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 47% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Xuelong GroupLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Xuelong GroupLtd 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.