Returns On Capital At Ningbo Xusheng Group (SHSE:603305) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Ningbo Xusheng Group (SHSE:603305) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.061 = CN¥603m ÷ (CN¥14b - CN¥3.8b) (Based on the trailing twelve months to June 2024).

Thus, Ningbo Xusheng Group has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.3% average generated by the Auto Components industry.

See 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.

The Trend Of ROCE

When we looked at the ROCE trend at Ningbo Xusheng Group, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Ningbo Xusheng Group's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Xusheng Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One more thing to note, we've identified 1 warning sign with Ningbo Xusheng Group and understanding this should be part of your investment process.

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.