Be Wary Of Ningbo Xusheng Group (SHSE:603305) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ningbo Xusheng Group (SHSE:603305) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Ningbo Xusheng Group is:

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

0.086 = CN¥673m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Xusheng Group has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Ningbo Xusheng Group

In the above chart we have measured Ningbo Xusheng Group'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 Ningbo Xusheng Group .

How Are Returns Trending?

When we looked at the ROCE trend at Ningbo Xusheng Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Ningbo Xusheng Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Ningbo Xusheng Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last five years. Therefore based on the analysis done in this article, we don't think Ningbo Xusheng Group has the makings of a multi-bagger.

If you'd like to know about the risks facing Ningbo Xusheng Group, we've discovered 1 warning sign that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com