Ningbo Xusheng Group (SHSE:603305) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ningbo Xusheng Group (SHSE:603305), it didn't seem to tick all of these boxes.

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. To calculate this metric for Ningbo Xusheng Group, this is the formula:

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

0.052 = CN¥530m ÷ (CN¥13b - CN¥3.1b) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Xusheng Group has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

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'd like, you can check out the forecasts from the analysts covering Ningbo Xusheng Group for free.

So How Is Ningbo Xusheng Group's ROCE 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 12% 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.

Our Take On Ningbo Xusheng Group's ROCE

To conclude, we've found that Ningbo Xusheng Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 3 warning signs for Ningbo Xusheng Group that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.