The Returns On Capital At Jiangnan Yifan MotorLtd (SZSE:301023) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next 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. In light of that, when we looked at Jiangnan Yifan MotorLtd (SZSE:301023) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Jiangnan Yifan MotorLtd:

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

0.056 = CN¥45m ÷ (CN¥871m - CN¥69m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangnan Yifan MotorLtd has an ROCE of 5.6%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

See our latest analysis for Jiangnan Yifan MotorLtd

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

So How Is Jiangnan Yifan MotorLtd's ROCE Trending?

On the surface, the trend of ROCE at Jiangnan Yifan MotorLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 39% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Jiangnan Yifan MotorLtd has decreased its current liabilities to 7.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Jiangnan Yifan MotorLtd's ROCE

In summary, we're somewhat concerned by Jiangnan Yifan MotorLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 29% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Jiangnan Yifan MotorLtd (2 are concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.