If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CALB Group (HKG:3931) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on CALB Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0098 = CN¥657m ÷ (CN¥100b - CN¥33b) (Based on the trailing twelve months to June 2023).
Thus, CALB Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.5%.
View our latest analysis for CALB Group
In the above chart we have measured CALB Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CALB Group.
The Trend Of ROCE
CALB Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses three years ago, but now it's earning 1.0% which is a sight for sore eyes. In addition to that, CALB Group is employing 548% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On CALB Group's ROCE
In summary, it's great to see that CALB Group has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 2.6% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
Like most companies, CALB Group does come with some risks, and we've found 2 warning signs 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.
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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.