To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Trans-China Automotive Holdings (Catalist:VI2) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Trans-China Automotive Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥52m ÷ (CN¥1.8b - CN¥1.2b) (Based on the trailing twelve months to December 2022).
Therefore, Trans-China Automotive Holdings has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 8.6%.
View our latest analysis for Trans-China Automotive Holdings
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'd like to look at how Trans-China Automotive Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Trans-China Automotive Holdings' ROCE Trending?
When we looked at the ROCE trend at Trans-China Automotive Holdings, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 8.2% from 16% four 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, Trans-China Automotive Holdings' current liabilities are still rather high at 65% of total assets. 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.
Our Take On Trans-China Automotive Holdings' ROCE
In summary, we're somewhat concerned by Trans-China Automotive Holdings' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.