There's Been No Shortage Of Growth Recently For Jiangsu Xinquan Automotive TrimLtd's (SHSE:603179) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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, Jiangsu Xinquan Automotive TrimLtd (SHSE:603179) looks quite promising in regards to its trends of return on capital.

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)

0.16 = CN¥1.2b ÷ (CN¥15b - CN¥7.0b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Xinquan Automotive TrimLtd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

Check out our latest analysis for Jiangsu Xinquan Automotive TrimLtd

Above you can see how the current ROCE for Jiangsu Xinquan Automotive TrimLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Xinquan Automotive TrimLtd .

What Does the ROCE Trend For Jiangsu Xinquan Automotive TrimLtd Tell Us?

We like the trends that we're seeing from Jiangsu Xinquan Automotive TrimLtd. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 252% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Jiangsu Xinquan Automotive TrimLtd has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. 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

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Jiangsu Xinquan Automotive TrimLtd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Jiangsu Xinquan Automotive TrimLtd can keep these trends up, it could have a bright future ahead.

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 can't be ignored!) that you should know about.

While Jiangsu Xinquan Automotive TrimLtd 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.