Investors Met With Slowing Returns on Capital At Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799) looks decent, right now, so lets see what the trend of returns can tell us.

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

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 Changzhou Xingyu Automotive Lighting SystemsLtd is:

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

0.13 = CN¥1.3b ÷ (CN¥15b - CN¥5.0b) (Based on the trailing twelve months to June 2024).

Thus, Changzhou Xingyu Automotive Lighting SystemsLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Auto Components industry.

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, you can check out the forecasts from the analysts covering Changzhou Xingyu Automotive Lighting SystemsLtd for free.

What Can We Tell From Changzhou Xingyu Automotive Lighting SystemsLtd's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 118% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

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

To sum it up, Changzhou Xingyu Automotive Lighting SystemsLtd has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Changzhou Xingyu Automotive Lighting SystemsLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 601799 on our platform.

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.