Some Investors May Be Worried About Shinelong Automotive Lightweight Application's (HKG:1930) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

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)

0.066 = CN¥23m ÷ (CN¥598m - CN¥245m) (Based on the trailing twelve months to June 2023).

Therefore, Shinelong Automotive Lightweight Application has an ROCE of 6.6%. Even though it's in line with the industry average of 7.5%, it's still a low return by itself.

View our latest analysis for Shinelong Automotive Lightweight Application

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're interested in investigating Shinelong Automotive Lightweight Application's past further, check out this free graph covering Shinelong Automotive Lightweight Application's 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. Around five years ago the returns on capital were 32%, but since then they've fallen to 6.6%. 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 side note, Shinelong Automotive Lightweight Application has done well to pay down its current liabilities to 41% 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From 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. Since the stock has declined 26% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Shinelong Automotive Lightweight Application does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While Shinelong Automotive Lightweight Application 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.