What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Changchun Engley Automobile IndustryLtd (SHSE:601279) and its ROCE trend, we weren't exactly thrilled.

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

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 Changchun Engley Automobile IndustryLtd is:

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

0.022 = CN¥121m ÷ (CN¥7.9b - CN¥2.3b) (Based on the trailing twelve months to June 2024).

Thus, Changchun Engley Automobile IndustryLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changchun Engley Automobile IndustryLtd's ROCE against it's prior returns. If you'd like to look at how Changchun Engley Automobile IndustryLtd has performed in the past in other metrics, you can view this free graph of Changchun Engley Automobile IndustryLtd's past earnings, revenue and cash flow.

So How Is Changchun Engley Automobile IndustryLtd's ROCE Trending?

We weren't thrilled with the trend because Changchun Engley Automobile IndustryLtd's ROCE has reduced by 76% over the last five years, while the business employed 41% more capital. That being said, Changchun Engley Automobile IndustryLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Changchun Engley Automobile IndustryLtd's earnings and if they change as a result from the capital raise. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

What We Can Learn From Changchun Engley Automobile IndustryLtd's ROCE

To conclude, we've found that Changchun Engley Automobile IndustryLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with Changchun Engley Automobile IndustryLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.