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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Luoyang Xinqianglian Slewing Bearing (SZSE:300850) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Luoyang Xinqianglian Slewing Bearing is:

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

0.058 = CN¥396m ÷ (CN¥9.9b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

So, Luoyang Xinqianglian Slewing Bearing has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

In the above chart we have measured Luoyang Xinqianglian Slewing Bearing's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Luoyang Xinqianglian Slewing Bearing .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 1,078%. That being said, Luoyang Xinqianglian Slewing Bearing raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Luoyang Xinqianglian Slewing Bearing might not have received a full period of earnings contribution from it. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Key Takeaway

To conclude, we've found that Luoyang Xinqianglian Slewing Bearing is reinvesting in the business, but returns have been falling. Since the stock has declined 69% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Luoyang Xinqianglian Slewing Bearing we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com