Stock Analysis

Changchun Engley Automobile IndustryLtd's (SHSE:601279) Returns On Capital Not Reflecting Well On The Business

SHSE:601279
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Changchun Engley Automobile IndustryLtd (SHSE:601279) 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)

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. Analysts use this formula to calculate it for Changchun Engley Automobile IndustryLtd:

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

0.018 = CN¥102m ÷ (CN¥7.8b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

So, Changchun Engley Automobile IndustryLtd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.0%.

Check out our latest analysis for Changchun Engley Automobile IndustryLtd

roce
SHSE:601279 Return on Capital Employed January 3rd 2025

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Changchun Engley Automobile IndustryLtd.

The Trend Of ROCE

We weren't thrilled with the trend because Changchun Engley Automobile IndustryLtd's ROCE has reduced by 79% over the last five years, while the business employed 41% more capital. Usually this isn't ideal, but given Changchun Engley Automobile IndustryLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Changchun Engley Automobile IndustryLtd's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

What We Can Learn From Changchun Engley Automobile IndustryLtd's ROCE

We're a bit apprehensive about Changchun Engley Automobile IndustryLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 49% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Changchun Engley Automobile IndustryLtd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.