Investors Met With Slowing Returns on Capital At Zhejiang Songyuan Automotive Safety SystemsLtd (SZSE:300893)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Zhejiang Songyuan Automotive Safety SystemsLtd (SZSE:300893) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Zhejiang Songyuan Automotive Safety SystemsLtd, this is the formula:

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

0.18 = CN¥224m ÷ (CN¥1.7b - CN¥445m) (Based on the trailing twelve months to December 2023).

Therefore, Zhejiang Songyuan Automotive Safety SystemsLtd has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.6% it's much better.

Check out our latest analysis for Zhejiang Songyuan Automotive Safety SystemsLtd

In the above chart we have measured Zhejiang Songyuan Automotive Safety SystemsLtd'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 Zhejiang Songyuan Automotive Safety SystemsLtd .

What Does the ROCE Trend For Zhejiang Songyuan Automotive Safety SystemsLtd Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 294% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

The Key Takeaway

The main thing to remember is that Zhejiang Songyuan Automotive Safety SystemsLtd has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 83% return if they held over the last three years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you're still interested in Zhejiang Songyuan Automotive Safety SystemsLtd it's worth checking out our FREE intrinsic value approximation for 300893 to see if it's trading at an attractive price in other respects.

While Zhejiang Songyuan Automotive Safety SystemsLtd 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.