Shandong Linglong TyreLtd (SHSE:601966) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shandong Linglong TyreLtd (SHSE:601966), we don't think it's current trends fit the mold of a multi-bagger.

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 Shandong Linglong TyreLtd:

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

0.071 = CN¥1.9b ÷ (CN¥44b - CN¥18b) (Based on the trailing twelve months to March 2024).

Therefore, Shandong Linglong TyreLtd has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

Check out our latest analysis for Shandong Linglong TyreLtd

Above you can see how the current ROCE for Shandong Linglong TyreLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shandong Linglong TyreLtd .

How Are Returns Trending?

When we looked at the ROCE trend at Shandong Linglong TyreLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 10% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shandong Linglong TyreLtd's current liabilities are still rather high at 41% of total assets. 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.

What We Can Learn From Shandong Linglong TyreLtd's ROCE

While returns have fallen for Shandong Linglong TyreLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 45% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Shandong Linglong TyreLtd does have some risks though, and we've spotted 1 warning sign for Shandong Linglong TyreLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.