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. Having said that, from a first glance at Feilong Auto Components (SZSE:002536) 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)?

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 Feilong Auto Components is:

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

0.069 = CN¥244m ÷ (CN¥5.0b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

So, Feilong Auto Components has an ROCE of 6.9%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

In the above chart we have measured Feilong Auto Components' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Feilong Auto Components for free.

What The Trend Of ROCE Can Tell Us

In terms of Feilong Auto Components' historical ROCE trend, it doesn't exactly demand attention. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Feilong Auto Components has done well to reduce current liabilities to 29% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In conclusion, Feilong Auto Components has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 69% over the last five years, 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.

If you want to continue researching Feilong Auto Components, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Feilong Auto Components 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.