Jiangyin Pivot Automotive Products (SZSE:301181) Will Be Hoping To Turn Its Returns On Capital Around

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Jiangyin Pivot Automotive Products (SZSE:301181) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangyin Pivot Automotive Products, this is the formula:

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

0.097 = CN¥140m ÷ (CN¥1.6b - CN¥158m) (Based on the trailing twelve months to March 2024).

So, Jiangyin Pivot Automotive Products has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 6.9%.

Check out our latest analysis for Jiangyin Pivot Automotive Products

In the above chart we have measured Jiangyin Pivot Automotive Products' 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 Jiangyin Pivot Automotive Products for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Jiangyin Pivot Automotive Products doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 9.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangyin Pivot Automotive Products has done well to pay down its current liabilities to 9.9% 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

In summary, despite lower returns in the short term, we're encouraged to see that Jiangyin Pivot Automotive Products is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Jiangyin Pivot Automotive Products does have some risks though, and we've spotted 1 warning sign for Jiangyin Pivot Automotive Products that you might be interested in.

While Jiangyin Pivot Automotive Products isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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