If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Chongqing VDL Electronics (SZSE:301121), it didn't seem to tick all of these boxes.

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 Chongqing VDL Electronics is:

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

0.007 = CN¥12m ÷ (CN¥2.5b - CN¥702m) (Based on the trailing twelve months to June 2024).

Therefore, Chongqing VDL Electronics has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chongqing VDL Electronics' past further, check out this free graph covering Chongqing VDL Electronics' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Chongqing VDL Electronics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.7% from 17% five years ago. 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.

The Bottom Line On Chongqing VDL Electronics' ROCE

While returns have fallen for Chongqing VDL Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Chongqing VDL Electronics does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Chongqing VDL Electronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.