Investors Could Be Concerned With Luoyang Xinqianglian Slewing Bearing's (SZSE:300850) Returns On Capital

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. 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 Luoyang Xinqianglian Slewing Bearing (SZSE:300850) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Luoyang Xinqianglian Slewing Bearing is:

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

0.058 = CN¥396m ÷ (CN¥9.9b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Therefore, Luoyang Xinqianglian Slewing Bearing has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

Check out our latest analysis for Luoyang Xinqianglian Slewing Bearing

Above you can see how the current ROCE for Luoyang Xinqianglian Slewing Bearing 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 Luoyang Xinqianglian Slewing Bearing for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Luoyang Xinqianglian Slewing Bearing's ROCE has reduced by 65% over the last five years, while the business employed 1,078% more capital. That being said, Luoyang Xinqianglian Slewing Bearing raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Luoyang Xinqianglian Slewing Bearing's earnings and if they change as a result from the capital raise. Additionally, we found that Luoyang Xinqianglian Slewing Bearing's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

What We Can Learn From Luoyang Xinqianglian Slewing Bearing's ROCE

To conclude, we've found that Luoyang Xinqianglian Slewing Bearing is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 82% in the last three years. Therefore based on the analysis done in this article, we don't think Luoyang Xinqianglian Slewing Bearing has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Luoyang Xinqianglian Slewing Bearing (including 1 which 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.