There Are Reasons To Feel Uneasy About Guangzhou Tongda Auto Electric's (SHSE:603390) Returns On 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Guangzhou Tongda Auto Electric (SHSE:603390) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Guangzhou Tongda Auto Electric:

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

0.015 = CN¥24m ÷ (CN¥1.8b - CN¥182m) (Based on the trailing twelve months to September 2024).

So, Guangzhou Tongda Auto Electric has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

See our latest analysis for Guangzhou Tongda Auto Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Tongda Auto Electric's ROCE against it's prior returns. If you're interested in investigating Guangzhou Tongda Auto Electric's past further, check out this free graph covering Guangzhou Tongda Auto Electric's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangzhou Tongda Auto Electric Tell Us?

In terms of Guangzhou Tongda Auto Electric's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. 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.

On a related note, Guangzhou Tongda Auto Electric has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Guangzhou Tongda Auto Electric's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangzhou Tongda Auto Electric is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 50% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guangzhou Tongda Auto Electric (of which 1 is a bit concerning!) that you should know about.

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.