Jiangsu Xinquan Automotive TrimLtd (SHSE:603179) Hasn't Managed To Accelerate Its Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Jiangsu Xinquan Automotive TrimLtd's (SHSE:603179) trend of ROCE, we liked what we saw.

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

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. To calculate this metric for Jiangsu Xinquan Automotive TrimLtd, this is the formula:

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

0.15 = CN¥1.1b ÷ (CN¥14b - CN¥6.9b) (Based on the trailing twelve months to June 2024).

Thus, Jiangsu Xinquan Automotive TrimLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.7% it's much better.

View our latest analysis for Jiangsu Xinquan Automotive TrimLtd

In the above chart we have measured Jiangsu Xinquan Automotive TrimLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Xinquan Automotive TrimLtd .

What Can We Tell From Jiangsu Xinquan Automotive TrimLtd's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 246% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% 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.

Another thing to note, Jiangsu Xinquan Automotive TrimLtd has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Jiangsu Xinquan Automotive TrimLtd's ROCE

To sum it up, Jiangsu Xinquan Automotive TrimLtd has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 373% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Jiangsu Xinquan Automotive TrimLtd (of which 1 makes us a bit uncomfortable!) that you should know about.

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.