Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Shenyang Jinbei Automotive's (SHSE:600609) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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 Shenyang Jinbei Automotive is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥312m ÷ (CN¥4.5b - CN¥2.8b) (Based on the trailing twelve months to September 2023).
Therefore, Shenyang Jinbei Automotive has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 5.8% it's much better.
See our latest analysis for Shenyang Jinbei Automotive
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenyang Jinbei Automotive's ROCE against it's prior returns. If you're interested in investigating Shenyang Jinbei Automotive's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Shenyang Jinbei Automotive. The data shows that returns on capital have increased by 257% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Shenyang Jinbei Automotive may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 62% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
From what we've seen above, Shenyang Jinbei Automotive has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 36% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.