The Returns On Capital At Shinelong Automotive Lightweight Application (HKG:1930) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

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

So, Shinelong Automotive Lightweight Application has an ROCE of 4.2%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

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 want to delve into the historical earnings, revenue and cash flow of Shinelong Automotive Lightweight Application, check out these free graphs here.

How Are Returns Trending?

In terms of Shinelong Automotive Lightweight Application's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 35% over the last five years. 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 related note, Shinelong Automotive Lightweight Application has decreased its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shinelong Automotive Lightweight Application is reinvesting for growth and has higher sales as a result. But since the stock has dived 82% in the last three years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Shinelong Automotive Lightweight Application does have some risks, we noticed 4 warning signs (and 1 which is 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.