Grand Baoxin Auto Group's (HKG:1293) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Grand Baoxin Auto Group (HKG:1293), we weren't too hopeful.

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. The formula for this calculation on Grand Baoxin Auto Group is:

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

0.036 = CN¥409m ÷ (CN¥21b - CN¥9.8b) (Based on the trailing twelve months to June 2024).

Thus, Grand Baoxin Auto Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.8%.

See our latest analysis for Grand Baoxin Auto Group

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'd like to look at how Grand Baoxin Auto Group has performed in the past in other metrics, you can view this free graph of Grand Baoxin Auto Group's past earnings, revenue and cash flow.

So How Is Grand Baoxin Auto Group's ROCE Trending?

We are a bit worried about the trend of returns on capital at Grand Baoxin Auto Group. About five years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Grand Baoxin Auto Group becoming one if things continue as they have.

On a related note, Grand Baoxin Auto Group has decreased its current liabilities to 46% 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. 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 46% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Grand Baoxin Auto Group's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 89% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Grand Baoxin Auto Group (including 2 which are concerning) .

While Grand Baoxin Auto Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.