Capital Allocation Trends At Shanghai Baolong Automotive (SHSE:603197) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shanghai Baolong Automotive (SHSE:603197), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shanghai Baolong Automotive:

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

0.071 = CN¥398m ÷ (CN¥9.6b - CN¥4.1b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Baolong Automotive has an ROCE of 7.1%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

Check out our latest analysis for Shanghai Baolong Automotive

Above you can see how the current ROCE for Shanghai Baolong Automotive 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 Shanghai Baolong Automotive .

So How Is Shanghai Baolong Automotive's ROCE Trending?

On the surface, the trend of ROCE at Shanghai Baolong Automotive doesn't inspire confidence. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 7.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shanghai Baolong Automotive's current liabilities are still rather high at 42% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Shanghai Baolong Automotive's ROCE

While returns have fallen for Shanghai Baolong Automotive 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 85% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 4 warning signs we've spotted with Shanghai Baolong Automotive (including 1 which shouldn't be ignored) .

While Shanghai Baolong Automotive 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.