Returns On Capital At Guangzhou Jinzhong Auto Parts Manufacturing (SZSE:301133) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Guangzhou Jinzhong Auto Parts Manufacturing (SZSE:301133) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. 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)

0.079 = CN¥112m ÷ (CN¥1.8b - CN¥359m) (Based on the trailing twelve months to June 2024).

So, Guangzhou Jinzhong Auto Parts Manufacturing has an ROCE of 7.9%. On its own, that's a low figure but it's around the 7.2% average generated by the Auto Components industry.

Check out our latest analysis for Guangzhou Jinzhong Auto Parts Manufacturing

Above you can see how the current ROCE for Guangzhou Jinzhong Auto Parts Manufacturing 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 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. Over the last five years, returns on capital have decreased to 7.9% from 17% five years ago. 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

In summary, despite lower returns in the short term, we're encouraged to see that Guangzhou Jinzhong Auto Parts Manufacturing is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Guangzhou Jinzhong Auto Parts Manufacturing (of which 1 is significant!) that you should know about.

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.

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

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.