Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at China MeiDong Auto Holdings (HKG:1268), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for China MeiDong Auto Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥549m ÷ (CN¥14b - CN¥6.7b) (Based on the trailing twelve months to June 2024).
So, China MeiDong Auto Holdings has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.9% average generated by the Specialty Retail industry.
Check out our latest analysis for China MeiDong Auto Holdings
Above you can see how the current ROCE for China MeiDong Auto Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China MeiDong Auto Holdings .
What Can We Tell From China MeiDong Auto Holdings' ROCE Trend?
In terms of China MeiDong Auto Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 7.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Another thing to note, China MeiDong Auto Holdings has a high ratio of current liabilities to total assets of 47%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, we're somewhat concerned by China MeiDong Auto Holdings' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 75% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to continue researching China MeiDong Auto Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.