Return Trends At Qingdao Sentury Tire (SZSE:002984) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Qingdao Sentury Tire's (SZSE:002984) ROCE trend, we were pretty happy with what we saw.

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

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 Qingdao Sentury Tire:

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

0.15 = CN¥2.2b ÷ (CN¥17b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Thus, Qingdao Sentury Tire has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.1% it's much better.

Check out our latest analysis for Qingdao Sentury Tire

In the above chart we have measured Qingdao Sentury Tire's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Qingdao Sentury Tire .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 205% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Qingdao Sentury Tire has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 11% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

To sum it up, Qingdao Sentury Tire has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 9.4% over the last three years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

If you'd like to know more about Qingdao Sentury Tire, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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.