Returns At Chongqing Changan Automobile (SZSE:000625) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Chongqing Changan Automobile's (SZSE:000625) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Chongqing Changan Automobile:

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

0.037 = CN¥3.2b ÷ (CN¥187b - CN¥100b) (Based on the trailing twelve months to June 2024).

Therefore, Chongqing Changan Automobile has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.

See our latest analysis for Chongqing Changan Automobile

In the above chart we have measured Chongqing Changan Automobile's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Changan Automobile .

What The Trend Of ROCE Can Tell Us

Chongqing Changan Automobile has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Chongqing Changan Automobile is utilizing 68% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Chongqing Changan Automobile has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Chongqing Changan Automobile's ROCE

To the delight of most shareholders, Chongqing Changan Automobile has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 3 warning signs for Chongqing Changan Automobile you'll probably want to know about.

While Chongqing Changan Automobile isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.