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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Ningbo Jifeng Auto Parts (SHSE:603997), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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).
Thus, 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%.
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 for free.
The Trend Of ROCE
When we looked at the ROCE trend at Ningbo Jifeng Auto Parts, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 21% five years ago. 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. Without this increase, it's likely that ROCE would be even lower than 8.0%. 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.
Our Take On Ningbo Jifeng Auto Parts' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Ningbo Jifeng Auto Parts is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 50% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we've found 1 warning sign for Ningbo Jifeng Auto Parts that we think you should be aware of.
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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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.