Investors Could Be Concerned With Bafang Electric (Suzhou)Ltd's (SHSE:603489) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Bafang Electric (Suzhou)Ltd (SHSE:603489), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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

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

0.056 = CN¥154m ÷ (CN¥3.4b - CN¥636m) (Based on the trailing twelve months to September 2023).

Thus, Bafang Electric (Suzhou)Ltd has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

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're interested, you can view the analysts predictions in our free analyst report for Bafang Electric (Suzhou)Ltd .

What Does the ROCE Trend For Bafang Electric (Suzhou)Ltd Tell Us?

In terms of Bafang Electric (Suzhou)Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 59%, but since then they've fallen to 5.6%. 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.

On a side note, Bafang Electric (Suzhou)Ltd has done well to pay down its current liabilities to 19% 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.

In Conclusion...

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. We expect this has contributed to the stock plummeting 74% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Bafang Electric (Suzhou)Ltd (1 is potentially serious) you should be aware of.

While Bafang Electric (Suzhou)Ltd 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.