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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Changchun Engley Automobile IndustryLtd (SHSE:601279), it didn't seem to tick all of these boxes.

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. To calculate this metric for Changchun Engley Automobile IndustryLtd, this is the formula:

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

0.022 = CN¥121m ÷ (CN¥7.9b - CN¥2.3b) (Based on the trailing twelve months to June 2024).

Thus, Changchun Engley Automobile IndustryLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.2%.

See our latest analysis for Changchun Engley Automobile IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changchun Engley Automobile IndustryLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Changchun Engley Automobile IndustryLtd.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 9.1% five years ago, while capital employed has grown 41%. 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. Changchun Engley Automobile IndustryLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Key Takeaway

In summary, Changchun Engley Automobile IndustryLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Changchun Engley Automobile IndustryLtd (of which 1 doesn't sit too well with us!) that you should know about.

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.