If you want to identify your next multibagger, there are some important trends to look out for. One common approach is to look for companies that: Return value Capital employed increasing with growth (ROCE) amount of capital employed. If you see this, it usually means the company has a good business model and plenty of opportunities for profitable reinvestment.However, when I looked into it, Geely Auto Holdings (HKG:175), I don’t think the current trend fits into the multibagger mold.
About Return on Capital Employed (ROCE)
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. Analysts use the following formula to calculate Geely Automobile Holdings’ profit.
Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.02 = 1.8 billion CN ÷ (164 billion CN – 74 billion CN) (Based on the previous 12 months to June 2023).
So, Geely Automobile Holdings’ ROCE is 2.0%. After all, this is a poor return, below the auto industry average of 5.9%.
Check out our latest analysis for Geely Automobile Holdings.
Above you can see how Geely Automobile Holdings’ current ROCE compares to its previous return on equity, but history can only tell us so much. If you want to know what analysts are predicting for the future, check out this article. free Report on Geely Automobile Holding.
What ROCE trends tell us
When it comes to Geely Automobile Holdings’ historical ROCE movement, the trend is not great. Over the past five years, the return on capital has declined from 32% five years ago to 2.0%. However, given that both capital employed and revenue are increasing, it appears that the business is currently pursuing growth for short-term returns. If these investments are successful, they can bode very well for long-term stock performance.
On a separate note, it’s important to know that Geely Automobile Holdings’ current liabilities to total assets ratio is 45%, which we think is quite high. This may create a certain degree of risk because we essentially operate with a substantial reliance on suppliers and other short-term creditors. Ideally, we would like this to decrease, as a decrease would mean fewer risk-bearing obligations.
Our take on Geely Automobile Holdings’ ROCE
Geely Automobile Holdings’ earnings have fallen recently, but it’s encouraging to see that its sales are growing and it’s reinvesting in the business. But these growth trends haven’t translated into growing profits, as the stock has fallen 35% over the past five years. So we recommend researching this stock further to find out what the other fundamentals of the business are telling us.
Finally, we discovered that 1 warning sign for Geely Automobile Holding We think you should know.
Geely Automobile Holding may not be the most profitable company, but check this out. free A list of companies with strong balance sheets and high return on equity.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Geely Automobile Holdings is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, 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.