Mingxin Automotive Leather's (SHSE:605068) Returns On Capital Not Reflecting Well On The Business

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. In light of that, when we looked at Mingxin Automotive Leather (SHSE:605068) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Mingxin Automotive Leather is:

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

0.025 = CN¥70m ÷ (CN¥3.5b - CN¥704m) (Based on the trailing twelve months to March 2024).

So, Mingxin Automotive Leather has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

See our latest analysis for Mingxin Automotive Leather

Above you can see how the current ROCE for Mingxin Automotive Leather 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 Mingxin Automotive Leather .

What Does the ROCE Trend For Mingxin Automotive Leather Tell Us?

When we looked at the ROCE trend at Mingxin Automotive Leather, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Mingxin Automotive Leather's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Mingxin Automotive Leather is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Mingxin Automotive Leather does come with some risks, and we've found 1 warning sign that you should be aware of.

While Mingxin Automotive Leather may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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