The Trends At China ZhengTong Auto Services Holdings (HKG:1728) That You Should Know About

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at China ZhengTong Auto Services Holdings (HKG:1728), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on China ZhengTong Auto Services Holdings is:

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

0.073 = CN¥1.4b ÷ (CN¥41b - CN¥23b) (Based on the trailing twelve months to June 2020).

So, China ZhengTong Auto Services Holdings has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.

See our latest analysis for China ZhengTong Auto Services Holdings

Above you can see how the current ROCE for China ZhengTong Auto Services Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China ZhengTong Auto Services Holdings here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at China ZhengTong Auto Services Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that China ZhengTong Auto Services Holdings has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. 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...

We're a bit apprehensive about China ZhengTong Auto Services Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 66% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 3 warning signs with China ZhengTong Auto Services Holdings (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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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