Shinelong Automotive Lightweight Application's (HKG:1930) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Shinelong Automotive Lightweight Application (HKG:1930) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Shinelong Automotive Lightweight Application, this is the formula:

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

0.047 = CN¥15m ÷ (CN¥492m - CN¥176m) (Based on the trailing twelve months to December 2021).

Thus, Shinelong Automotive Lightweight Application has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

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?

In terms of Shinelong Automotive Lightweight Application's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.7% from 34% five years ago. However it looks like Shinelong Automotive Lightweight Application might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shinelong Automotive Lightweight Application has decreased its current liabilities to 36% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shinelong Automotive Lightweight Application's ROCE

In summary, Shinelong Automotive Lightweight Application is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 7.5% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Shinelong Automotive Lightweight Application does have some risks, we noticed 5 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.