What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in CETC Acoustic-Optic-Electronic Technology's (SHSE:600877) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 CETC Acoustic-Optic-Electronic Technology, this is the formula:

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

0.14 = CN¥274m ÷ (CN¥2.6b - CN¥625m) (Based on the trailing twelve months to December 2021).

So, CETC Acoustic-Optic-Electronic Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Auto industry.

See our latest analysis for CETC Acoustic-Optic-Electronic Technology

Above you can see how the current ROCE for CETC Acoustic-Optic-Electronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For CETC Acoustic-Optic-Electronic Technology Tell Us?

CETC Acoustic-Optic-Electronic Technology has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. In addition to that, CETC Acoustic-Optic-Electronic Technology is employing 1,746% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 24%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that CETC Acoustic-Optic-Electronic Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From CETC Acoustic-Optic-Electronic Technology's ROCE

To the delight of most shareholders, CETC Acoustic-Optic-Electronic Technology has now broken into profitability. Since the stock has returned a solid 78% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about CETC Acoustic-Optic-Electronic Technology, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While CETC Acoustic-Optic-Electronic Technology 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.