Shanghai Baolong Automotive (SHSE:603197) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shanghai Baolong Automotive (SHSE:603197), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Shanghai Baolong Automotive is:

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

0.098 = CN¥501m ÷ (CN¥7.7b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Baolong Automotive has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.8%.

Check out our latest analysis for Shanghai Baolong Automotive

In the above chart we have measured Shanghai Baolong Automotive'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 Shanghai Baolong Automotive for free.

What Can We Tell From Shanghai Baolong Automotive's ROCE Trend?

On the surface, the trend of ROCE at Shanghai Baolong Automotive doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.8%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On 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 97% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 3 warning signs for Shanghai Baolong Automotive (2 make us uncomfortable) 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.