Be Wary Of Shanghai Yongmaotai Automotive Technology (SHSE:605208) And Its 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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shanghai Yongmaotai Automotive Technology (SHSE:605208) 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)?

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. To calculate this metric for Shanghai Yongmaotai Automotive Technology, this is the formula:

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

0.016 = CN¥43m ÷ (CN¥3.7b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Shanghai Yongmaotai Automotive Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

View our latest analysis for Shanghai Yongmaotai Automotive Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Yongmaotai Automotive Technology's ROCE against it's prior returns. If you'd like to look at how Shanghai Yongmaotai Automotive Technology has performed in the past in other metrics, you can view this free graph of Shanghai Yongmaotai Automotive Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Yongmaotai Automotive Technology Tell Us?

In terms of Shanghai Yongmaotai Automotive Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Shanghai Yongmaotai Automotive Technology's ROCE

While returns have fallen for Shanghai Yongmaotai Automotive Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 5 warning signs we've spotted with Shanghai Yongmaotai Automotive Technology (including 2 which shouldn't be ignored) .

While Shanghai Yongmaotai Automotive Technology 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.