Shinelong Automotive Lightweight Application (HKG:1930) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shinelong Automotive Lightweight Application (HKG:1930), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Shinelong Automotive Lightweight Application is:

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

0.042 = CN¥14m ÷ (CN¥522m - CN¥200m) (Based on the trailing twelve months to June 2022).

Thus, Shinelong Automotive Lightweight Application has an ROCE of 4.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.

See our latest analysis for Shinelong Automotive Lightweight Application

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shinelong Automotive Lightweight Application's ROCE against it's prior returns. If you're interested in investigating Shinelong Automotive Lightweight Application's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Shinelong Automotive Lightweight Application doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 35% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shinelong Automotive Lightweight Application has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shinelong Automotive Lightweight Application. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shinelong Automotive Lightweight Application (of which 1 shouldn't be ignored!) that you should know about.

While Shinelong Automotive Lightweight Application isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.