If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Changzhou Tenglong AutoPartsCo.Ltd's (SHSE:603158) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Changzhou Tenglong AutoPartsCo.Ltd is:

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

0.11 = CN¥256m ÷ (CN¥4.2b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

So, Changzhou Tenglong AutoPartsCo.Ltd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 5.8% it's much better.

Check out our latest analysis for Changzhou Tenglong AutoPartsCo.Ltd

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

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 97% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Changzhou Tenglong AutoPartsCo.Ltd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 43% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Changzhou Tenglong AutoPartsCo.Ltd's ROCE

To sum it up, Changzhou Tenglong AutoPartsCo.Ltd has simply been reinvesting capital steadily, at those decent rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you want to know some of the risks facing Changzhou Tenglong AutoPartsCo.Ltd we've found 2 warning signs (1 is concerning!) 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.