To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over China Yongda Automobiles Services Holdings' (HKG:3669) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Yongda Automobiles Services Holdings, this is the formula:

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

0.17 = CN¥3.1b ÷ (CN¥31b - CN¥13b) (Based on the trailing twelve months to June 2022).

Therefore, China Yongda Automobiles Services Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Specialty Retail industry.

Check out our latest analysis for China Yongda Automobiles Services Holdings

In the above chart we have measured China Yongda Automobiles Services Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Yongda Automobiles Services Holdings here for free.

What Does the ROCE Trend For China Yongda Automobiles Services Holdings Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 74% more capital into its operations. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, China Yongda Automobiles Services Holdings has done well to reduce current liabilities to 42% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 42%, some of that risk is still prevalent.

The Bottom Line

The main thing to remember is that China Yongda Automobiles Services Holdings has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 44%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Like most companies, China Yongda Automobiles Services Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.