Zhejiang Taotao Vehicles (SZSE:301345) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Zhejiang Taotao Vehicles (SZSE:301345) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Zhejiang Taotao Vehicles, this is the formula:

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

0.15 = CN¥459m ÷ (CN¥4.5b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Taotao Vehicles has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 2.6% generated by the Auto industry.

Check out our latest analysis for Zhejiang Taotao Vehicles

Above you can see how the current ROCE for Zhejiang Taotao Vehicles 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 Zhejiang Taotao Vehicles .

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Taotao Vehicles doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 31% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Zhejiang Taotao Vehicles has decreased its current liabilities to 31% 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.

What We Can Learn From Zhejiang Taotao Vehicles' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Taotao Vehicles is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 15% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Taotao Vehicles (of which 1 can't be ignored!) that you should know about.

While Zhejiang Taotao Vehicles 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.