Returns On Capital Signal Tricky Times Ahead For CIMC Vehicles (Group) (SZSE:301039)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at CIMC Vehicles (Group) (SZSE:301039), it didn't seem to tick all of these boxes.

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What Is 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. To calculate this metric for CIMC Vehicles (Group), this is the formula:

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

0.076 = CN¥1.1b ÷ (CN¥24b - CN¥9.1b) (Based on the trailing twelve months to September 2024).

So, CIMC Vehicles (Group) has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

View our latest analysis for CIMC Vehicles (Group)

Above you can see how the current ROCE for CIMC Vehicles (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CIMC Vehicles (Group) for free.

How Are Returns Trending?

When we looked at the ROCE trend at CIMC Vehicles (Group), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.6% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

We're a bit apprehensive about CIMC Vehicles (Group) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 2.0% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

CIMC Vehicles (Group) does have some risks though, and we've spotted 2 warning signs for CIMC Vehicles (Group) that you might be interested in.

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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.