Sinomach AutomobileLtd (SHSE:600335) Is Finding It Tricky To Allocate Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Sinomach AutomobileLtd (SHSE:600335), the trends above didn't look too great.

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 AutomobileLtd:

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

0.017 = CN¥203m ÷ (CN¥36b - CN¥24b) (Based on the trailing twelve months to September 2024).

So, Sinomach AutomobileLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 6.0%.

View our latest analysis for Sinomach AutomobileLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sinomach AutomobileLtd has performed in the past in other metrics, you can view this free graph of Sinomach AutomobileLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Sinomach AutomobileLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Sinomach AutomobileLtd to turn into a multi-bagger.

On a separate but related note, it's important to know that Sinomach AutomobileLtd has a current liabilities to total assets ratio of 67%, 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.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 35% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Sinomach AutomobileLtd we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Sinomach AutomobileLtd 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.