There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 investigating Changzhou Tenglong AutoPartsCo.Ltd (SHSE:603158), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Changzhou Tenglong AutoPartsCo.Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥236m ÷ (CN¥4.1b - CN¥1.7b) (Based on the trailing twelve months to June 2023).
Thus, Changzhou Tenglong AutoPartsCo.Ltd has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 5.6% generated by the Auto Components industry, it's much better.
Check out 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 want to delve into the historical earnings, revenue and cash flow of Changzhou Tenglong AutoPartsCo.Ltd, check out these free graphs here.
What Can We Tell From Changzhou Tenglong AutoPartsCo.Ltd's ROCE Trend?
In terms of Changzhou Tenglong AutoPartsCo.Ltd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Bottom Line
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 trends are starting to be recognized by investors since the stock has delivered a 19% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Changzhou Tenglong AutoPartsCo.Ltd (of which 1 doesn't sit too well with us!) that you should know about.
While Changzhou Tenglong AutoPartsCo.Ltd 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.