United Faith Auto-EngineeringLtd (SZSE:301112) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think United Faith Auto-EngineeringLtd (SZSE:301112) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for United Faith Auto-EngineeringLtd, this is the formula:

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

0.034 = CN¥43m ÷ (CN¥1.6b - CN¥363m) (Based on the trailing twelve months to September 2023).

Therefore, United Faith Auto-EngineeringLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.2%.

Check out our latest analysis for United Faith Auto-EngineeringLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of United Faith Auto-EngineeringLtd.

What Does the ROCE Trend For United Faith Auto-EngineeringLtd Tell Us?

On the surface, the trend of ROCE at United Faith Auto-EngineeringLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, United Faith Auto-EngineeringLtd has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line On United Faith Auto-EngineeringLtd's ROCE

Bringing it all together, while we're somewhat encouraged by United Faith Auto-EngineeringLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 24% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

United Faith Auto-EngineeringLtd does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.

While United Faith Auto-EngineeringLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.