Sinomach Auto mobileLtd (SHSE:600335) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Sinomach Auto mobileLtd (SHSE:600335), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Sinomach Auto mobileLtd:

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

0.0062 = CN¥75m ÷ (CN¥32b - CN¥20b) (Based on the trailing twelve months to March 2024).

Thus, Sinomach Auto mobileLtd has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 4.5%.

Check out our latest analysis for Sinomach Auto mobileLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sinomach Auto mobileLtd's ROCE against it's prior returns. If you'd like to look at how Sinomach Auto mobileLtd has performed in the past in other metrics, you can view this free graph of Sinomach Auto mobileLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Sinomach Auto mobileLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Sinomach Auto mobileLtd to turn into a multi-bagger.

On a separate but related note, it's important to know that Sinomach Auto mobileLtd has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sinomach Auto mobileLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Sinomach Auto mobileLtd (1 can't be ignored) you should be aware of.

While Sinomach Auto mobileLtd 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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