Sinotruk Jinan TruckLtd (SZSE:000951) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sinotruk Jinan TruckLtd (SZSE:000951), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Sinotruk Jinan TruckLtd is:

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

0.096 = CN¥1.6b ÷ (CN¥41b - CN¥25b) (Based on the trailing twelve months to March 2024).

Thus, Sinotruk Jinan TruckLtd has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Machinery industry, it's much better.

View our latest analysis for Sinotruk Jinan TruckLtd

Above you can see how the current ROCE for Sinotruk Jinan TruckLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sinotruk Jinan TruckLtd .

So How Is Sinotruk Jinan TruckLtd's ROCE Trending?

On the surface, the trend of ROCE at Sinotruk Jinan TruckLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 25% 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, Sinotruk Jinan TruckLtd has decreased its current liabilities to 60% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Sinotruk Jinan TruckLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sinotruk Jinan TruckLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 52% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Sinotruk Jinan TruckLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sinotruk Jinan TruckLtd 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.

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