Jiangsu Xinri E-Vehicle (SHSE:603787) Will Want To Turn Around Its Return Trends

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangsu Xinri E-Vehicle (SHSE:603787), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Jiangsu Xinri E-Vehicle is:

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

0.018 = CN¥29m ÷ (CN¥3.7b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Xinri E-Vehicle has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 2.6%.

See our latest analysis for Jiangsu Xinri E-Vehicle

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Xinri E-Vehicle.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangsu Xinri E-Vehicle, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Jiangsu Xinri E-Vehicle's current liabilities have increased over the last five years to 56% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Jiangsu Xinri E-Vehicle's ROCE

We're a bit apprehensive about Jiangsu Xinri E-Vehicle because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 3 warning signs for Jiangsu Xinri E-Vehicle that we think you should be aware of.

While Jiangsu Xinri E-Vehicle may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.