Returns Are Gaining Momentum At Changchun FAWAY Automobile ComponentsLtd (SHSE:600742)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at Changchun FAWAY Automobile ComponentsLtd (SHSE:600742) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Changchun FAWAY Automobile ComponentsLtd:

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

0.047 = CN¥512m ÷ (CN¥21b - CN¥10b) (Based on the trailing twelve months to September 2023).

Therefore, Changchun FAWAY Automobile ComponentsLtd has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Auto Components industry average of 5.8%.

View our latest analysis for Changchun FAWAY Automobile ComponentsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Changchun FAWAY Automobile ComponentsLtd's past further, check out this free graph covering Changchun FAWAY Automobile ComponentsLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Changchun FAWAY Automobile ComponentsLtd Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.7%. The amount of capital employed has increased too, by 91%. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Changchun FAWAY Automobile ComponentsLtd's ROCE

In summary, it's great to see that Changchun FAWAY Automobile ComponentsLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 9.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 1 warning sign for Changchun FAWAY Automobile ComponentsLtd you'll probably want to know about.

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.