If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So, when we ran our eye over Sichuan Injet Electric's (SZSE:300820) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sichuan Injet Electric is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CN¥533m ÷ (CN¥4.0b - CN¥1.5b) (Based on the trailing twelve months to September 2024).
Therefore, Sichuan Injet Electric has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electrical industry average of 5.8%.
Above you can see how the current ROCE for Sichuan Injet Electric 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 Sichuan Injet Electric .
What Can We Tell From Sichuan Injet Electric's ROCE Trend?
It's hard not to be impressed by Sichuan Injet Electric's returns on capital. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 383% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Sichuan Injet Electric can keep this up, we'd be very optimistic about its future.
The Bottom Line
Sichuan Injet Electric has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you'd like to know about the risks facing Sichuan Injet Electric, we've discovered 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
