Shanghai Xinpeng IndustryLtd's (SZSE:002328) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shanghai Xinpeng IndustryLtd (SZSE:002328), it didn't seem to tick all of these boxes.

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

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 Shanghai Xinpeng IndustryLtd, this is the formula:

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

0.052 = CN¥230m ÷ (CN¥6.0b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

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

See our latest analysis for Shanghai Xinpeng IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Xinpeng IndustryLtd'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 Shanghai Xinpeng IndustryLtd.

How Are Returns Trending?

In terms of Shanghai Xinpeng IndustryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.2% from 7.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Shanghai Xinpeng IndustryLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Shanghai Xinpeng IndustryLtd 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.