CWB Automotive Electronics' (SHSE:605005) Returns Have Hit A Wall

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So, when we ran our eye over CWB Automotive Electronics' (SHSE:605005) trend of ROCE, we liked what we saw.

Understanding 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 CWB Automotive Electronics, this is the formula:

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

0.14 = CN¥277m ÷ (CN¥2.3b - CN¥365m) (Based on the trailing twelve months to September 2024).

Thus, CWB Automotive Electronics has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Auto Components industry.

See our latest analysis for CWB Automotive Electronics

Above you can see how the current ROCE for CWB Automotive Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CWB Automotive Electronics .

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 110% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, CWB Automotive Electronics has done well to reduce current liabilities to 16% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On CWB Automotive Electronics' ROCE

In the end, CWB Automotive Electronics has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 0.4% over the last three years, we'd suspect the market is beginning to recognize these trends. So to determine if CWB Automotive Electronics is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While CWB Automotive Electronics doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 605005 on our platform.

While CWB Automotive Electronics 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.