Some Investors May Be Worried About San Yang Ma (Chongqing) LogisticsLtd's (SZSE:001317) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think San Yang Ma (Chongqing) LogisticsLtd (SZSE:001317) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for San Yang Ma (Chongqing) LogisticsLtd, this is the formula:

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

0.011 = CN¥12m ÷ (CN¥1.4b - CN¥368m) (Based on the trailing twelve months to September 2023).

Therefore, San Yang Ma (Chongqing) LogisticsLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 7.1%.

See our latest analysis for San Yang Ma (Chongqing) LogisticsLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of San Yang Ma (Chongqing) LogisticsLtd.

What Does the ROCE Trend For San Yang Ma (Chongqing) LogisticsLtd Tell Us?

On the surface, the trend of ROCE at San Yang Ma (Chongqing) LogisticsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 30% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, San Yang Ma (Chongqing) LogisticsLtd has decreased its current liabilities to 27% 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.

What We Can Learn From San Yang Ma (Chongqing) LogisticsLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that San Yang Ma (Chongqing) LogisticsLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 35% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

San Yang Ma (Chongqing) LogisticsLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.