Be Wary Of Shanghai Vico Precision Mold &Plastics Co (SZSE:301499) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Shanghai Vico Precision Mold &Plastics Co (SZSE:301499) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Shanghai Vico Precision Mold &Plastics Co:

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

0.046 = CN¥60m ÷ (CN¥1.5b - CN¥198m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Vico Precision Mold &Plastics Co has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.2%.

View our latest analysis for Shanghai Vico Precision Mold &Plastics Co

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Vico Precision Mold &Plastics Co's ROCE against it's prior returns. If you're interested in investigating Shanghai Vico Precision Mold &Plastics Co's past further, check out this free graph covering Shanghai Vico Precision Mold &Plastics Co's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Vico Precision Mold &Plastics Co Tell Us?

In terms of Shanghai Vico Precision Mold &Plastics Co's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.6% from 15% five years ago. 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 related note, Shanghai Vico Precision Mold &Plastics Co has decreased its current liabilities to 13% 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. 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 Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Vico Precision Mold &Plastics Co. However, despite the promising trends, the stock has fallen 23% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Shanghai Vico Precision Mold &Plastics Co that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.