What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Shanghai Yongmaotai Automotive Technology (SHSE:605208) and its ROCE trend, we weren’t exactly thrilled.

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 Shanghai Yongmaotai Automotive Technology is:

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

0.02 = CN¥52m ÷ (CN¥3.5b – CN¥948m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Yongmaotai Automotive Technology has an ROCE of 2.0%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 6.9%.

Check out our latest analysis for Shanghai Yongmaotai Automotive Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Yongmaotai Automotive Technology’s ROCE against it’s prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Yongmaotai Automotive Technology.

What Does the ROCE Trend For Shanghai Yongmaotai Automotive Technology Tell Us?

In terms of Shanghai Yongmaotai Automotive Technology’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 2.0% from 16% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shanghai Yongmaotai Automotive Technology has done well to pay down its current liabilities to 27% 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. 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.

The Bottom Line On Shanghai Yongmaotai Automotive Technology’s ROCE

In summary, despite lower returns in the short term, we’re encouraged to see that Shanghai Yongmaotai Automotive Technology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 47% over the last three years, so there might be an opportunity here for astute investors. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we’ve spotted with Shanghai Yongmaotai Automotive Technology (including 2 which are concerning) .

While Shanghai Yongmaotai Automotive Technology 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.

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