Shinelong Automotive Lightweight Application (HKG:1930) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Shinelong Automotive Lightweight Application (HKG:1930) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Shinelong Automotive Lightweight Application:

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

0.06 = CN¥18m ÷ (CN¥460m - CN¥156m) (Based on the trailing twelve months to June 2021).

So, Shinelong Automotive Lightweight Application has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

View 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Shinelong Automotive Lightweight Application doesn't inspire confidence. Over the last four years, returns on capital have decreased to 6.0% from 35% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Shinelong Automotive Lightweight Application has decreased its current liabilities to 34% 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Shinelong Automotive Lightweight Application have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 55% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Shinelong Automotive Lightweight Application, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

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.

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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