Guangzhou Jinzhong Auto Parts Manufacturing (SZSE:301133) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Guangzhou Jinzhong Auto Parts Manufacturing (SZSE:301133) and its ROCE trend, we weren't exactly thrilled.

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 Guangzhou Jinzhong Auto Parts Manufacturing:

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

0.074 = CN¥67m ÷ (CN¥1.2b - CN¥284m) (Based on the trailing twelve months to September 2023).

Thus, Guangzhou Jinzhong Auto Parts Manufacturing has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.8%.

See our latest analysis for Guangzhou Jinzhong Auto Parts Manufacturing

In the above chart we have measured Guangzhou Jinzhong Auto Parts Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Jinzhong Auto Parts Manufacturing for free.

So How Is Guangzhou Jinzhong Auto Parts Manufacturing's ROCE Trending?

On the surface, the trend of ROCE at Guangzhou Jinzhong Auto Parts Manufacturing doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 7.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Guangzhou Jinzhong Auto Parts Manufacturing's ROCE

While returns have fallen for Guangzhou Jinzhong Auto Parts Manufacturing in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Guangzhou Jinzhong Auto Parts Manufacturing that you might find interesting.

While Guangzhou Jinzhong Auto Parts Manufacturing 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.