Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Changzhou Xingyu Automotive Lighting SystemsLtd is:

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

0.091 = CN¥862m ÷ (CN¥14b - CN¥4.3b) (Based on the trailing twelve months to September 2023).

Therefore, Changzhou Xingyu Automotive Lighting SystemsLtd has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 5.8% generated by the Auto Components industry, it's much better.

See our latest analysis for Changzhou Xingyu Automotive Lighting SystemsLtd

Above you can see how the current ROCE for Changzhou Xingyu Automotive Lighting SystemsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Changzhou Xingyu Automotive Lighting SystemsLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Changzhou Xingyu Automotive Lighting SystemsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Changzhou Xingyu Automotive Lighting SystemsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Changzhou Xingyu Automotive Lighting SystemsLtd. And long term investors must be optimistic going forward because the stock has returned a huge 150% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Changzhou Xingyu Automotive Lighting SystemsLtd (of which 1 is concerning!) that you should know about.

While Changzhou Xingyu Automotive Lighting SystemsLtd 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.