Returns On Capital At Ningbo Jifeng Auto Parts (SHSE:603997) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Ningbo Jifeng Auto Parts (SHSE:603997), 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 Ningbo Jifeng Auto Parts:

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

0.022 = CN¥233m ÷ (CN¥20b - CN¥9.3b) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Jifeng Auto Parts has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.1%.

See our latest analysis for Ningbo Jifeng Auto Parts

Above you can see how the current ROCE for Ningbo Jifeng Auto Parts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Jifeng Auto Parts for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 27% five years ago, while the business's capital employed increased by 435%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Ningbo Jifeng Auto Parts' earnings and if they change as a result from the capital raise.

On a side note, Ningbo Jifeng Auto Parts' current liabilities have increased over the last five years to 47% 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. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Ningbo Jifeng Auto Parts' ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Jifeng Auto Parts' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Ningbo Jifeng Auto Parts it's worth checking out our FREE intrinsic value approximation for 603997 to see if it's trading at an attractive price in other respects.

While Ningbo Jifeng Auto Parts 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.