Some Investors May Be Worried About Nexteer Automotive Group's (HKG:1316) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Nexteer Automotive Group (HKG:1316), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Nexteer Automotive Group is:

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

0.11 = US$245m ÷ (US$3.2b - US$917m) (Based on the trailing twelve months to June 2021).

Thus, Nexteer Automotive Group has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Auto Components industry.

Check out our latest analysis for Nexteer Automotive Group

In the above chart we have measured Nexteer Automotive Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nexteer Automotive Group here for free.

What Can We Tell From Nexteer Automotive Group's ROCE Trend?

When we looked at the ROCE trend at Nexteer Automotive Group, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 11%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Nexteer Automotive Group's ROCE

While returns have fallen for Nexteer Automotive Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 14% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Nexteer Automotive Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Nexteer Automotive Group 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.