What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Ningbo CixingLtd (SZSE:300307) so let's look a bit deeper.

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 Ningbo CixingLtd is:

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

0.044 = CN¥142m ÷ (CN¥5.0b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

Therefore, Ningbo CixingLtd has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.4% average generated by the Machinery industry.

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

What The Trend Of ROCE Can Tell Us

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 839%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Ningbo CixingLtd appears to been achieving more with less, since the business is using 21% less capital to run its operation. Ningbo CixingLtd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Ningbo CixingLtd's ROCE

From what we've seen above, Ningbo CixingLtd has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 66% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Ningbo CixingLtd and understanding them should be part of your investment process.

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.