Be Wary Of FAWER Automotive Parts Limited (SZSE:000030) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at FAWER Automotive Parts Limited (SZSE:000030) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on FAWER Automotive Parts Limited is:

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

0.01 = CN¥97m ÷ (CN¥17b - CN¥7.0b) (Based on the trailing twelve months to June 2024).

Therefore, FAWER Automotive Parts Limited has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.2%.

See our latest analysis for FAWER Automotive Parts Limited

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 FAWER Automotive Parts Limited.

What Can We Tell From FAWER Automotive Parts Limited's ROCE Trend?

In terms of FAWER Automotive Parts Limited's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.3% 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.

On a side note, FAWER Automotive Parts Limited's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From FAWER Automotive Parts Limited's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that FAWER Automotive Parts Limited is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for FAWER Automotive Parts Limited (of which 1 makes us a bit uncomfortable!) 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.