Bafang Electric (Suzhou)Ltd (SHSE:603489) Might Be Having Difficulty Using Its Capital Effectively

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. Although, when we looked at Bafang Electric (Suzhou)Ltd (SHSE:603489), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Bafang Electric (Suzhou)Ltd is:

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

0.021 = CN¥58m ÷ (CN¥3.3b - CN¥505m) (Based on the trailing twelve months to March 2024).

Therefore, Bafang Electric (Suzhou)Ltd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 5.2%.

View our latest analysis for Bafang Electric (Suzhou)Ltd

In the above chart we have measured Bafang Electric (Suzhou)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Bafang Electric (Suzhou)Ltd .

How Are Returns Trending?

When we looked at the ROCE trend at Bafang Electric (Suzhou)Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 56% 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, Bafang Electric (Suzhou)Ltd has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Bafang Electric (Suzhou)Ltd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Bafang Electric (Suzhou)Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. This could explain why the stock has sunk a total of 83% in the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Bafang Electric (Suzhou)Ltd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.