If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 on that note, China Automotive Engineering Research Institute (SHSE:601965) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for China Automotive Engineering Research Institute:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥975m ÷ (CN¥8.2b - CN¥1.4b) (Based on the trailing twelve months to December 2023).
Thus, China Automotive Engineering Research Institute has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 3.0% generated by the Auto industry.
In the above chart we have measured China Automotive Engineering Research Institute'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 analyst report for China Automotive Engineering Research Institute .
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at China Automotive Engineering Research Institute. Over the last five years, returns on capital employed have risen substantially to 14%. 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 48%. So we're very much inspired by what we're seeing at China Automotive Engineering Research Institute thanks to its ability to profitably reinvest capital.
The Key Takeaway
To sum it up, China Automotive Engineering Research Institute has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 163% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if China Automotive Engineering Research Institute can keep these trends up, it could have a bright future ahead.
If you want to continue researching China Automotive Engineering Research Institute, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.