Slowing Rates Of Return At Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.12 = CN¥1.2b ÷ (CN¥15b - CN¥4.8b) (Based on the trailing twelve months to March 2024).

Thus, Changzhou Xingyu Automotive Lighting SystemsLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Auto Components industry.

Check out 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 .

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

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 113% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Changzhou Xingyu Automotive Lighting SystemsLtd has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 89% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Changzhou Xingyu Automotive Lighting SystemsLtd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Changzhou Xingyu Automotive Lighting SystemsLtd 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.