Returns On Capital At HUAYU Automotive Systems (SHSE:600741) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential 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 briefly looking over the numbers, we don't think HUAYU Automotive Systems (SHSE:600741) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for HUAYU Automotive Systems:

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

0.078 = CN¥5.8b ÷ (CN¥181b - CN¥107b) (Based on the trailing twelve months to September 2024).

Thus, HUAYU Automotive Systems has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.0%.

Check out our latest analysis for HUAYU Automotive Systems

Above you can see how the current ROCE for HUAYU Automotive Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for HUAYU Automotive Systems .

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for HUAYU Automotive Systems' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at HUAYU Automotive Systems in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that HUAYU Automotive Systems has been paying out a decent 44% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

On a separate but related note, it's important to know that HUAYU Automotive Systems has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On HUAYU Automotive Systems' ROCE

In a nutshell, HUAYU Automotive Systems has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think HUAYU Automotive Systems has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for HUAYU Automotive Systems that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.