Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Chongqing Chuanyi Automation (SHSE:603100) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Chongqing Chuanyi Automation:

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

0.10 = CN¥437m ÷ (CN¥8.3b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

So, Chongqing Chuanyi Automation has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.

View our latest analysis for Chongqing Chuanyi Automation

In the above chart we have measured Chongqing Chuanyi Automation'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 Chongqing Chuanyi Automation.

What Does the ROCE Trend For Chongqing Chuanyi Automation Tell Us?

We like the trends that we're seeing from Chongqing Chuanyi Automation. Over the last five years, returns on capital employed have risen substantially to 10%. 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 71%. So we're very much inspired by what we're seeing at Chongqing Chuanyi Automation thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Chongqing Chuanyi Automation has a current liabilities to total assets ratio of 47%, 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 Chongqing Chuanyi Automation's ROCE

All in all, it's terrific to see that Chongqing Chuanyi Automation is reaping the rewards from prior investments and is growing its capital base. And a remarkable 231% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Chongqing Chuanyi Automation, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Chongqing Chuanyi Automation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.