Did you know that there are some financial indicators that can provide clues to potential multibaggers? In an ideal world, companies would invest more capital in their business and ideally the return they would get on that capital. It is hoped that this will also increase. If you see this, it usually means the company has a good business model and plenty of opportunities for profitable reinvestment. With that in mind, Shanghai Daymei Automotive Interior Products’ (SHSE:603730) ROCE looks decent at the moment, so let’s see what the return trends can tell us.
Return on Capital Employed (ROCE): What is it?
In case you aren’t familiar, ROCE is a metric that measures how much pre-tax profit (as a percentage) a company earns on the capital invested in its business. This calculation formula for the interior of Shanghai Damei Automobile is as follows:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.16 = CA$889 million ÷ (CAD $6.7 billion – CA$1.2 billion) (Based on trailing twelve months to June 2024).
In other words, Shanghai Damei Automobile Interiors’ ROCE is 16%. In absolute terms, this is a satisfactory return, but compared to the auto parts industry average of 7.2%, it’s much better.
Check out our latest analysis for Shanghai Damei Auto Interiors.
SHSE:603730 Return on Capital Employed on October 14, 2024
In the graph above, we have measured Shanghai Damei Automobile Interior’s previous ROCE against its previous performance, but the future is probably more important. If you’re interested, check out our free analyst report on Shanghai Damei Auto Interiors to see what analysts are forecasting.
So, what are the trends in the ROCE of Shanghai Damei Automobile Interior?
The ROCE trend is not very noticeable, but the overall return is decent. The company has consistently grown its returns by 16% over the past five years, and the capital employed within the business has grown by 48% during that time. However, 16% is a moderate ROCE, so it’s good to see that the company can continue to reinvest at such a decent rate of return. Steady returns in this sector are unattractive, but if maintained over the long term they often provide excellent rewards for shareholders.
Another thing to note is that even though ROCE has remained relatively flat over the past five years, current liabilities have declined to 18% of total assets, which is good from a management perspective. In effect, suppliers are reducing their funding to the business, which may reduce some elements of risk.
The conclusion is…
In summary, Shanghai Damei Auto Interiors is simply reinvesting capital steadily at a decent rate of return. So it’s no surprise to see that shareholders have returned a respectable 77% over the last five years. So while investors may be considering the underlying positive trend, we still think the stock is worth further consideration.
Like most companies, Shanghai Daimay Automotive Interior comes with some risks, and we’ve spotted 1 warning sign you should be aware of.
If you want to find solid companies with strong earnings, check out this free list of companies with strong balance sheets and good return 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
