China Automotive Engineering Research Institute (SHSE:601965) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Automotive Engineering Research Institute (SHSE:601965) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Automotive Engineering Research Institute, this is the formula:

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

0.13 = CN¥996m ÷ (CN¥9.5b - CN¥1.9b) (Based on the trailing twelve months to September 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 2.6% it's much better.

View our latest analysis for China Automotive Engineering Research Institute

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're interested, you can view the analysts predictions in our free analyst report for China Automotive Engineering Research Institute .

How Are Returns Trending?

We like the trends that we're seeing from China Automotive Engineering Research Institute. Over the last five years, returns on capital employed have risen substantially to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 64%. So we're very much inspired by what we're seeing at China Automotive Engineering Research Institute thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that China Automotive Engineering Research Institute 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. And a remarkable 203% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to continue researching China Automotive Engineering Research Institute, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.