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. 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 Shanghai Aerospace Automobile Electromechanical's (SHSE:600151) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Shanghai Aerospace Automobile Electromechanical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.008 = CN¥58m ÷ (CN¥12b - CN¥4.4b) (Based on the trailing twelve months to September 2023).
So, Shanghai Aerospace Automobile Electromechanical has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
View our latest analysis for Shanghai Aerospace Automobile Electromechanical
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Aerospace Automobile Electromechanical's ROCE against it's prior returns. If you're interested in investigating Shanghai Aerospace Automobile Electromechanical's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Shanghai Aerospace Automobile Electromechanical's ROCE Trending?
We're delighted to see that Shanghai Aerospace Automobile Electromechanical is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.8% on its capital. While returns have increased, the amount of capital employed by Shanghai Aerospace Automobile Electromechanical has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
The Bottom Line
To bring it all together, Shanghai Aerospace Automobile Electromechanical has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Shanghai Aerospace Automobile Electromechanical looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 600151 is currently trading for a fair price.
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.