Be Wary Of IAT Automobile Technology (SZSE:300825) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at IAT Automobile Technology (SZSE:300825), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for IAT Automobile Technology:

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

0.014 = CN¥39m ÷ (CN¥3.3b - CN¥444m) (Based on the trailing twelve months to September 2023).

So, IAT Automobile Technology has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 3.0%.

Check out our latest analysis for IAT Automobile Technology

Above you can see how the current ROCE for IAT Automobile Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for IAT Automobile Technology .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 7.6% five years ago, while capital employed has grown 162%. That being said, IAT Automobile Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence IAT Automobile Technology might not have received a full period of earnings contribution from it.

On a related note, IAT Automobile Technology has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On IAT Automobile Technology's ROCE

In summary, we're somewhat concerned by IAT Automobile Technology's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

IAT Automobile Technology does have some risks though, and we've spotted 1 warning sign for IAT Automobile Technology 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.