Returns On Capital At IAT Automobile Technology (SZSE:300825) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating IAT Automobile Technology (SZSE:300825), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 IAT Automobile Technology, this is the formula:

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

0.0071 = CN¥21m ÷ (CN¥3.4b - CN¥434m) (Based on the trailing twelve months to March 2024).

Thus, IAT Automobile Technology has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 2.9%.

Check out our latest analysis for IAT Automobile Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for IAT Automobile Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of IAT Automobile Technology.

What Can We Tell From IAT Automobile Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 9.5% five years ago, while the business's capital employed increased by 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with IAT Automobile Technology's earnings and if they change as a result from the capital raise.

On a side note, IAT Automobile Technology has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On IAT Automobile Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for IAT Automobile Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with IAT Automobile Technology (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While IAT Automobile 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com