Geely Automobile Holdings (HKG:175) may have trouble raising capital
If we want to find a stock that could grow over the long term, what underlying trends should we look for? A common approach is to try and find a company with returns on capital employed (ROCE), which are increasing, combined with a growing height of the capital employed. Ultimately, this shows that this is a company that reinvests profits with increasing returns. However, after research Geely Automobile Holdings (HKG:175), we don’t think its current trends fit the mold of a multibagger.
Return on Capital Employed (ROCE): What is it?
For those unsure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. To calculate this metric for Geely Automobile Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.054 = CN¥3.8b ÷ (CN¥109b – CN¥38b) (Based on the last twelve months ended June 2021).
Because of this, Geely Automobile Holdings has a ROCE of 5.4%. On its own, that’s a low yield, but it’s a lot better compared to the average 4.4% the auto industry yields.
Check out our latest analysis for Geely Automobile Holdings
You can see above how Geely Automobile Holdings’ current ROCE compares to its past returns on investments, but there’s only so much you can tell from the past. If you want to see what analysts are predicting for the future, be sure to check out ours for free Report for Geely Automobile Holdings.
How are the yields developing?
Regarding Geely Automobile Holdings historical ROCE movements, the trend is not fantastic. While the return on investment was 9.6% around five years ago, it has since fallen to 5.4%. Although both sales and the amount of assets employed in the company have increased, this could indicate that the company is investing for growth and the additional capital has resulted in a short-term reduction in ROCE. And if the increased capital generates additional returns, the company and thus the shareholders will benefit in the long term.
As an aside, Geely Automobile Holdings has done a fine job of paying down its current liabilities to 35% of total assets. So we could relate some of that to the decline in ROCE. This effectively means their suppliers or short-term creditors finance less of the business, which reduces some elements of risk. Some would argue that this reduces the company’s efficiency in generating ROCE as it now funds more operations with its own money.
The key to take away
In summary, despite lower short-term yields, we are encouraged to see Geely Automobile Holdings investing in growth and generating higher revenues as a result. And the stock has performed incredibly well, returning 128% over the past five years, so long-term investors are no doubt excited about this result. While investors seem to recognize these promising trends, we’d take a closer look at this stock to make sure the other metrics justify the positive view.
If you want to research further about Geely Automobile Holdings, you may be interested in learning more about the 2 warning signs which our analysis revealed.
While Geely Automobile Holdings doesn’t have the highest yield, look at this for free List of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.