We love these underlying trends in return on capital at Dongfeng Motor Group (HKG: 489)

What are the first trends to look for to identify a title that could multiply over the long term? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we have noticed some promising trends at Dongfeng motor group (HKG: 489) so let’s look a little deeper.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Dongfeng Motor Group:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.00026 = CN ¥ 49m ÷ (CN ¥ 325b – CN ¥ 142b) (Based on the last twelve months up to June 2021).

So, Dongfeng Motor Group has a ROCE of 0.03%. Ultimately, that’s a low yield and it’s below the auto industry average of 5.9%.

See our latest review for Dongfeng Motor Group

SEHK: 489 Return on capital employed on October 6, 2021

In the graph above, we measured Dongfeng Motor Group’s past ROCE against its past performance, but the future is arguably more important. If you like, you can view analyst forecasts covering Dongfeng Motor Group here for free.

The ROCE trend

The fact that Dongfeng Motor Group is now generating pre-tax profits on its previous investments is very encouraging. The company was making losses five years ago, but now it’s gaining 0.03%, which is a sight to behold. Not only that, but the business is using 70% more capital than before, but that’s to be expected of a business trying to achieve profitability. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.

Another thing to note, Dongfeng Motor Group has a high ratio of current liabilities to total assets of 44%. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.

The bottom line

To the delight of most shareholders, Dongfeng Motor Group has now returned to profitability. Given that the stock has delivered 12% to its shareholders over the past five years, it may be fair to think that investors are not yet fully aware of the promising trends. So with that in mind, we believe the stock deserves further research.

One more thing: we have identified 2 warning signs with Dongfeng Motor Group (at least 1 which is potentially serious), and understanding them would definitely help.

While Dongfeng Motor Group Does Not Achieve the Highest Efficiency, Check Out This free list of companies that generate high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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