If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Dazhong Transportation (Group) (SHSE:600611) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Dazhong Transportation (Group) is:

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

0.032 = CN¥405m ÷ (CN¥18b - CN¥5.8b) (Based on the trailing twelve months to December 2023).

Therefore, Dazhong Transportation (Group) has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Transportation industry average of 4.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dazhong Transportation (Group)'s ROCE against it's prior returns. If you're interested in investigating Dazhong Transportation (Group)'s past further, check out this free graph covering Dazhong Transportation (Group)'s past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Dazhong Transportation (Group)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 3.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Dazhong Transportation (Group)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dazhong Transportation (Group) is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 41% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Dazhong Transportation (Group) (1 shouldn't be ignored) you should be aware of.

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.