Returns On Capital At Changchun Engley Automobile IndustryLtd (SHSE:601279) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Changchun Engley Automobile IndustryLtd (SHSE:601279), 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. The formula for this calculation on Changchun Engley Automobile IndustryLtd is:

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

0.026 = CN¥148m ÷ (CN¥8.3b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

So, Changchun Engley Automobile IndustryLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.

See our latest analysis for Changchun Engley Automobile IndustryLtd

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 Engley Automobile IndustryLtd's past further, check out this free graph covering Changchun Engley Automobile IndustryLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Changchun Engley Automobile IndustryLtd's ROCE has reduced by 74% over the last five years, while the business employed 44% more capital. Usually this isn't ideal, but given Changchun Engley Automobile IndustryLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Changchun Engley Automobile IndustryLtd's earnings and if they change as a result from the capital raise.

What We Can Learn From Changchun Engley Automobile IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Changchun Engley Automobile IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 63% in the last three years. 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.

On a final note, we found 2 warning signs for Changchun Engley Automobile IndustryLtd (1 is a bit unpleasant) you should be aware of.

While Changchun Engley Automobile IndustryLtd 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.

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