Investors Could Be Concerned With Wuling Motors Holdings' (HKG:305) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Wuling Motors Holdings (HKG:305), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Wuling Motors Holdings, this is the formula:

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

0.027 = CN¥125m ÷ (CN¥16b - CN¥11b) (Based on the trailing twelve months to June 2023).

Thus, Wuling Motors Holdings has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.5%.

Check out our latest analysis for Wuling Motors Holdings

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 want to delve into the historical earnings, revenue and cash flow of Wuling Motors Holdings, check out these free graphs here.

What Can We Tell From Wuling Motors Holdings' ROCE Trend?

In terms of Wuling Motors Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.8% over the last five years. 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 side note, Wuling Motors Holdings' current liabilities are still rather high at 71% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're somewhat concerned by Wuling Motors Holdings' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Wuling Motors Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Wuling Motors Holdings 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.