There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in China Automotive Engineering Research Institute's (SHSE:601965) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.13 = CN¥949m ÷ (CN¥9.5b - CN¥2.1b) (Based on the trailing twelve months to June 2024).
Therefore, China Automotive Engineering Research Institute has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto industry average of 3.7% it's much better.
Above you can see how the current ROCE for China Automotive Engineering Research Institute compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Automotive Engineering Research Institute for free.
What Can We Tell From China Automotive Engineering Research Institute's ROCE Trend?
China Automotive Engineering Research Institute is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The amount of capital employed has increased too, by 53%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that China Automotive Engineering Research Institute is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 186% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 1 warning sign with China Automotive Engineering Research Institute and understanding it should be part of your investment process.
While China Automotive Engineering Research Institute may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
