If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sinomach Auto mobileLtd (SHSE:600335) 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?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sinomach Auto mobileLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = CN¥719m ÷ (CN¥35b - CN¥23b) (Based on the trailing twelve months to September 2023).
So, Sinomach Auto mobileLtd has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.5% average generated by the Retail Distributors industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sinomach Auto mobileLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sinomach Auto mobileLtd.
So How Is Sinomach Auto mobileLtd's ROCE Trending?
We weren't thrilled with the trend because Sinomach Auto mobileLtd's ROCE has reduced by 63% over the last five years, while the business employed 21% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Sinomach Auto mobileLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a separate but related note, it's important to know that Sinomach Auto mobileLtd has a current liabilities to total assets ratio of 65%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Sinomach Auto mobileLtd is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Sinomach Auto mobileLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...
While Sinomach Auto mobileLtd 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.