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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at CATARC Automotive Proving GroundLtd (SZSE:301215), it didn't seem to tick all of these boxes.

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. To calculate this metric for CATARC Automotive Proving GroundLtd, this is the formula:

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

0.049 = CN¥154m ÷ (CN¥3.4b - CN¥310m) (Based on the trailing twelve months to March 2024).

Thus, CATARC Automotive Proving GroundLtd has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Professional Services industry average of 5.7%.

Above you can see how the current ROCE for CATARC Automotive Proving GroundLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for CATARC Automotive Proving GroundLtd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at CATARC Automotive Proving GroundLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, CATARC Automotive Proving GroundLtd has done well to pay down its current liabilities to 9.0% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that CATARC Automotive Proving GroundLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching CATARC Automotive Proving GroundLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While CATARC Automotive Proving GroundLtd 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.

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