If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Changzhou Tenglong AutoPartsCo.Ltd (SHSE:603158) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Changzhou Tenglong AutoPartsCo.Ltd is:

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

0.063 = CN¥147m ÷ (CN¥3.7b - CN¥1.4b) (Based on the trailing twelve months to March 2022).

Thus, Changzhou Tenglong AutoPartsCo.Ltd has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

View our latest analysis for Changzhou Tenglong AutoPartsCo.Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Tenglong AutoPartsCo.Ltd's ROCE against it's prior returns. If you'd like to look at how Changzhou Tenglong AutoPartsCo.Ltd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Changzhou Tenglong AutoPartsCo.Ltd's ROCE Trend?

We weren't thrilled with the trend because Changzhou Tenglong AutoPartsCo.Ltd's ROCE has reduced by 59% over the last five years, while the business employed 147% more capital. That being said, Changzhou Tenglong AutoPartsCo.Ltd 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 Changzhou Tenglong AutoPartsCo.Ltd's earnings and if they change as a result from the capital raise.

On a side note, Changzhou Tenglong AutoPartsCo.Ltd's current liabilities have increased over the last five years to 37% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.3%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Changzhou Tenglong AutoPartsCo.Ltd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last five 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 to note, we've identified 4 warning signs with Changzhou Tenglong AutoPartsCo.Ltd and understanding them should be part of your investment process.

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.