Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Ningbo Jifeng Auto Parts (SHSE:603997) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Ningbo Jifeng Auto Parts, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥650m ÷ (CN¥17b - CN¥8.6b) (Based on the trailing twelve months to September 2023).
So, Ningbo Jifeng Auto Parts has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.8%.
See our latest analysis for Ningbo Jifeng Auto Parts
Above you can see how the current ROCE for Ningbo Jifeng Auto Parts 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 Ningbo Jifeng Auto Parts here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Ningbo Jifeng Auto Parts doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. 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, Ningbo Jifeng Auto Parts' current liabilities have increased over the last five years to 51% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
What We Can Learn From Ningbo Jifeng Auto Parts' ROCE
While returns have fallen for Ningbo Jifeng Auto Parts in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 93% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Ningbo Jifeng Auto Parts does have some risks though, and we've spotted 1 warning sign for Ningbo Jifeng Auto Parts that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.