Capital Allocation Trends At CATARC Automotive Proving GroundLtd (SZSE:301215) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think CATARC Automotive Proving GroundLtd (SZSE:301215) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for CATARC Automotive Proving GroundLtd:

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

0.049 = CN¥154m ÷ (CN¥3.4b - CN¥310m) (Based on the trailing twelve months to March 2024).

Therefore, CATARC Automotive Proving GroundLtd has an ROCE of 4.9%. On its own, that's a low figure but it's around the 5.7% average generated by the Professional Services industry.

Check out our latest analysis for CATARC Automotive Proving GroundLtd

Above you can see how the current ROCE for CATARC Automotive Proving GroundLtd 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 CATARC Automotive Proving GroundLtd .

The Trend Of ROCE

When we looked at the ROCE trend at CATARC Automotive Proving GroundLtd, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, CATARC Automotive Proving GroundLtd has decreased its current liabilities to 9.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

To conclude, we've found that CATARC Automotive Proving GroundLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing CATARC Automotive Proving GroundLtd that you might find interesting.

While CATARC Automotive Proving GroundLtd 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.