Changzhou Tenglong AutoPartsCo.Ltd (SHSE:603158) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, Changzhou Tenglong AutoPartsCo.Ltd (SHSE:603158) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Changzhou Tenglong AutoPartsCo.Ltd, this is the formula:

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

0.14 = CN¥376m ÷ (CN¥4.6b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Changzhou Tenglong AutoPartsCo.Ltd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.0% it's much better.

Check out our latest analysis for Changzhou Tenglong AutoPartsCo.Ltd

Above you can see how the current ROCE for Changzhou Tenglong AutoPartsCo.Ltd 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 Tenglong AutoPartsCo.Ltd for free.

What Can We Tell From Changzhou Tenglong AutoPartsCo.Ltd's ROCE Trend?

The trends we've noticed at Changzhou Tenglong AutoPartsCo.Ltd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 122%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Changzhou Tenglong AutoPartsCo.Ltd has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Changzhou Tenglong AutoPartsCo.Ltd's ROCE

To sum it up, Changzhou Tenglong AutoPartsCo.Ltd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Changzhou Tenglong AutoPartsCo.Ltd and understanding it 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.