Giti Tire (SHSE:600182) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Giti Tire (SHSE:600182), 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 Giti Tire:

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

0.11 = CN¥260m ÷ (CN¥3.8b - CN¥1.5b) (Based on the trailing twelve months to June 2023).

So, Giti Tire has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.8% it's much better.

View our latest analysis for Giti Tire

Historical performance is a great place to start when researching a stock so above you can see the gauge for Giti Tire's ROCE against it's prior returns. If you're interested in investigating Giti Tire's past further, check out this free graph covering Giti Tire's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Giti Tire, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Giti Tire might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Giti Tire is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Giti Tire (including 1 which is a bit unpleasant) .

While Giti Tire 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.