Changshu Tongrun Auto Accessory's (SHSE:603201) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Changshu Tongrun Auto Accessory (SHSE:603201), it didn't seem to tick all of these boxes.

What Is 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 Changshu Tongrun Auto Accessory, this is the formula:

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

0.17 = CN¥295m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

So, Changshu Tongrun Auto Accessory has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.5% it's much better.

See our latest analysis for Changshu Tongrun Auto Accessory

In the above chart we have measured Changshu Tongrun Auto Accessory'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 Changshu Tongrun Auto Accessory for free.

So How Is Changshu Tongrun Auto Accessory's ROCE Trending?

On the surface, the trend of ROCE at Changshu Tongrun Auto Accessory doesn't inspire confidence. To be more specific, ROCE has fallen from 45% over the last five years. 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.

On a related note, Changshu Tongrun Auto Accessory has decreased its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Changshu Tongrun Auto Accessory's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Changshu Tongrun Auto Accessory. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with Changshu Tongrun Auto Accessory (at least 1 which is significant) , and understanding these would certainly be useful.

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.