Jiangling Motors Corporation's (SZSE:000550) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Jiangling Motors Corporation's (SZSE:000550) returns on capital, so let's have a look.

Understanding 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 Jiangling Motors Corporation, this is the formula:

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

0.056 = CN¥617m ÷ (CN¥30b - CN¥19b) (Based on the trailing twelve months to September 2024).

Thus, Jiangling Motors Corporation has an ROCE of 5.6%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 2.6%.

View our latest analysis for Jiangling Motors Corporation

Above you can see how the current ROCE for Jiangling Motors Corporation 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 Jiangling Motors Corporation for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Jiangling Motors Corporation has broken into profitability. The company now earns 5.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Jiangling Motors Corporation has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 63% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Jiangling Motors Corporation's ROCE

To bring it all together, Jiangling Motors Corporation has done well to increase the returns it's generating from its capital employed. And a remarkable 117% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Jiangling Motors Corporation can keep these trends up, it could have a bright future ahead.

Jiangling Motors Corporation does have some risks though, and we've spotted 2 warning signs for Jiangling Motors Corporation that you might be interested in.

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.