Returns On Capital Are Showing Encouraging Signs At Beiqi Foton MotorLtd (SHSE:600166)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Beiqi Foton MotorLtd (SHSE:600166) looks quite promising in regards to its trends of return on capital.

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 Beiqi Foton MotorLtd is:

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

0.0091 = CN¥178m ÷ (CN¥53b - CN¥33b) (Based on the trailing twelve months to September 2023).

Therefore, Beiqi Foton MotorLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 3.0%.

Check out our latest analysis for Beiqi Foton MotorLtd

In the above chart we have measured Beiqi Foton MotorLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beiqi Foton MotorLtd .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Beiqi Foton MotorLtd is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.9% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 23%. Beiqi Foton MotorLtd could be selling under-performing assets since the ROCE is improving.

On a side note, Beiqi Foton MotorLtd's current liabilities are still rather high at 63% of total assets. 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 Bottom Line On Beiqi Foton MotorLtd's ROCE

In summary, it's great to see that Beiqi Foton MotorLtd has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 21% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for Beiqi Foton MotorLtd that we think you should be aware of.

While Beiqi Foton MotorLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.