Returns On Capital Are Showing Encouraging Signs At Ningbo Shuanglin Auto PartsLtd (SZSE:300100)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Ningbo Shuanglin Auto PartsLtd (SZSE:300100) so let's look a bit deeper.

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. To calculate this metric for Ningbo Shuanglin Auto PartsLtd, this is the formula:

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

0.12 = CN¥315m ÷ (CN¥5.5b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

So, Ningbo Shuanglin Auto PartsLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Auto Components industry.

View our latest analysis for Ningbo Shuanglin Auto PartsLtd

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 Ningbo Shuanglin Auto PartsLtd.

How Are Returns Trending?

It's great to see that Ningbo Shuanglin Auto PartsLtd has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. In regards to capital employed, Ningbo Shuanglin Auto PartsLtd is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Ningbo Shuanglin Auto PartsLtd could be selling under-performing assets since the ROCE is improving.

On a separate but related note, it's important to know that Ningbo Shuanglin Auto PartsLtd has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, Ningbo Shuanglin Auto PartsLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 101% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Ningbo Shuanglin Auto PartsLtd does have some risks though, and we've spotted 2 warning signs for Ningbo Shuanglin Auto PartsLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.