Capital Allocation Trends At Ningbo Xusheng Group (SHSE:603305) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Ningbo Xusheng Group (SHSE:603305), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Ningbo Xusheng Group:

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

0.11 = CN¥834m ÷ (CN¥10.0b - CN¥2.1b) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Xusheng Group has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Auto Components industry.

Check out our latest analysis for Ningbo Xusheng Group

Above you can see how the current ROCE for Ningbo Xusheng Group 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 Ningbo Xusheng Group .

So How Is Ningbo Xusheng Group's ROCE Trending?

In terms of Ningbo Xusheng Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Ningbo Xusheng Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ningbo Xusheng Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with Ningbo Xusheng Group (including 1 which doesn't sit too well with us) .

While Ningbo Xusheng Group 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.