Shandong Linglong TyreLtd's (SHSE:601966) Returns Have Hit A Wall

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shandong Linglong TyreLtd (SHSE:601966) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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)

0.091 = CN¥2.4b ÷ (CN¥44b - CN¥18b) (Based on the trailing twelve months to June 2024).

So, Shandong Linglong TyreLtd has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 7.2%.

View our latest analysis for Shandong Linglong TyreLtd

In the above chart we have measured Shandong Linglong TyreLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shandong Linglong TyreLtd for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Shandong Linglong TyreLtd. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 72% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Shandong Linglong TyreLtd has a current liabilities to total assets ratio of 40%, 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.

The Bottom Line On Shandong Linglong TyreLtd's ROCE

As we've seen above, Shandong Linglong TyreLtd's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Shandong Linglong TyreLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Shandong Linglong TyreLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.