There Are Reasons To Feel Uneasy About Keli Motor Group's (SZSE:002892) 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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Keli Motor Group (SZSE:002892), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Keli Motor Group is:

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

0.048 = CN¥75m ÷ (CN¥2.2b - CN¥624m) (Based on the trailing twelve months to September 2024).

So, Keli Motor Group has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.

View our latest analysis for Keli Motor Group

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

What The Trend Of ROCE Can Tell Us

In terms of Keli Motor Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 13% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Keli Motor Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Keli Motor Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 97% over the last five years, it would appear that investors are upbeat about the future. 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.

One more thing: We've identified 3 warning signs with Keli Motor Group (at least 1 which doesn't sit too well with us) , 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.