Capital Allocation Trends At Xiangyang Changyuandonggu Industry (SHSE:603950) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Xiangyang Changyuandonggu Industry (SHSE:603950) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Xiangyang Changyuandonggu Industry:

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

0.057 = CN¥202m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Thus, Xiangyang Changyuandonggu Industry has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.9%.

View our latest analysis for Xiangyang Changyuandonggu Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiangyang Changyuandonggu Industry's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xiangyang Changyuandonggu Industry.

What Can We Tell From Xiangyang Changyuandonggu Industry's ROCE Trend?

In terms of Xiangyang Changyuandonggu Industry's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Xiangyang Changyuandonggu Industry has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Xiangyang Changyuandonggu Industry's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xiangyang Changyuandonggu Industry is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with Xiangyang Changyuandonggu Industry (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

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.

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