What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Qingdao Sentury Tire (SZSE:002984) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Qingdao Sentury Tire is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥1.1b ÷ (CN¥15b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Therefore, Qingdao Sentury Tire has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.8%.
Check out our latest analysis for Qingdao Sentury Tire
Above you can see how the current ROCE for Qingdao Sentury Tire 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 Qingdao Sentury Tire here for free.
The Trend Of ROCE
We weren't thrilled with the trend because Qingdao Sentury Tire's ROCE has reduced by 48% over the last five years, while the business employed 222% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Qingdao Sentury Tire probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a related note, Qingdao Sentury Tire has decreased its current liabilities to 10% 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.
Our Take On Qingdao Sentury Tire's ROCE
While returns have fallen for Qingdao Sentury Tire in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 17% 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.
On a separate note, we've found 1 warning sign for Qingdao Sentury Tire you'll probably want to know about.
While Qingdao Sentury Tire 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.