Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China National Electric Apparatus Research Institute's (SHSE:688128) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China National Electric Apparatus Research Institute is:

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

0.10 = CN¥281m ÷ (CN¥5.8b - CN¥3.0b) (Based on the trailing twelve months to September 2022).

So, China National Electric Apparatus Research Institute has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 7.5% it's much better.

See our latest analysis for China National Electric Apparatus Research Institute

Above you can see how the current ROCE for China National Electric Apparatus Research Institute compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China National Electric Apparatus Research Institute here for free.

The Trend Of ROCE

The trends we've noticed at China National Electric Apparatus Research Institute are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 192%. So we're very much inspired by what we're seeing at China National Electric Apparatus Research Institute thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that China National Electric Apparatus Research Institute has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China National Electric Apparatus Research Institute has. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 1.2% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we've found 2 warning signs for China National Electric Apparatus Research Institute that we think you should be aware of.

While China National Electric Apparatus Research Institute may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.