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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shenyang Jinbei Automotive (SHSE:600609) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shenyang Jinbei Automotive, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = CN¥320m ÷ (CN¥4.3b - CN¥2.5b) (Based on the trailing twelve months to September 2024).

Therefore, Shenyang Jinbei Automotive has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shenyang Jinbei Automotive's past further, check out this free graph covering Shenyang Jinbei Automotive's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shenyang Jinbei Automotive, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 29% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, Shenyang Jinbei Automotive has done well to pay down its current liabilities to 58% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 58% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, we're somewhat concerned by Shenyang Jinbei Automotive's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 108% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shenyang Jinbei Automotive does have some risks though, and we've spotted 1 warning sign for Shenyang Jinbei Automotive that you might be interested in.

While Shenyang Jinbei Automotive 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.