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. And in light of that, the trends we're seeing at Prinx Chengshan Holdings' (HKG:1809) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Prinx Chengshan Holdings is:

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

0.26 = CN¥1.7b ÷ (CN¥11b - CN¥4.1b) (Based on the trailing twelve months to June 2024).

Therefore, Prinx Chengshan Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 7.2%.

In the above chart we have measured Prinx Chengshan Holdings' 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 Prinx Chengshan Holdings .

What Does the ROCE Trend For Prinx Chengshan Holdings Tell Us?

Investors would be pleased with what's happening at Prinx Chengshan Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 103% more capital is being employed now too. So we're very much inspired by what we're seeing at Prinx Chengshan Holdings thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, Prinx Chengshan Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 32% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 1 warning sign for Prinx Chengshan Holdings that we think you should be aware of.

Prinx Chengshan Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.