Returns On Capital Signal Tricky Times Ahead For CIMC Vehicles (Group) (HKG:1839)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at CIMC Vehicles (Group) (HKG:1839) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for CIMC Vehicles (Group):

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

0.13 = CN¥2.0b ÷ (CN¥25b - CN¥9.7b) (Based on the trailing twelve months to June 2023).

Thus, CIMC Vehicles (Group) has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Machinery industry.

See our latest analysis for CIMC Vehicles (Group)

Above you can see how the current ROCE for CIMC Vehicles (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CIMC Vehicles (Group).

So How Is CIMC Vehicles (Group)'s ROCE Trending?

In terms of CIMC Vehicles (Group)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, CIMC Vehicles (Group) has done well to pay down its current liabilities to 38% 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 On CIMC Vehicles (Group)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that CIMC Vehicles (Group) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 12% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about CIMC Vehicles (Group), we've spotted 2 warning signs, and 1 of them is concerning.

While CIMC Vehicles (Group) 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.