What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at China National Electric Apparatus Research Institute's (SHSE:688128) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.11 = CN¥321m ÷ (CN¥6.4b - CN¥3.5b) (Based on the trailing twelve months to March 2023).
So, China National Electric Apparatus Research Institute has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Electrical industry.
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.
So How Is China National Electric Apparatus Research Institute's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 172% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that China National Electric Apparatus Research Institute has consistently earned this amount. 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 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 54%, 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.
Our Take On China National Electric Apparatus Research Institute's ROCE
In the end, China National Electric Apparatus Research Institute has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 26% return if they held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know more about China National Electric Apparatus Research Institute, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
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.