What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shanghai Xinpeng IndustryLtd (SZSE:002328) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai Xinpeng IndustryLtd:

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

0.047 = CN¥175m ÷ (CN¥5.9b - CN¥2.2b) (Based on the trailing twelve months to September 2022).

So, Shanghai Xinpeng IndustryLtd has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.

Check out 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're interested in investigating Shanghai Xinpeng IndustryLtd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shanghai Xinpeng IndustryLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.7% from 8.6% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Xinpeng IndustryLtd. Furthermore the stock has climbed 64% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Shanghai Xinpeng IndustryLtd does have some risks though, and we've spotted 3 warning signs for Shanghai Xinpeng IndustryLtd that you might be interested in.

While Shanghai Xinpeng IndustryLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.