There's Been No Shortage Of Growth Recently For Changyuan Technology Group's (SHSE:600525) Returns On Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Changyuan Technology Group (SHSE:600525) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Changyuan Technology Group, this is the formula:

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

0.046 = CN¥299m ÷ (CN¥16b - CN¥9.5b) (Based on the trailing twelve months to September 2023).

So, Changyuan Technology Group has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.4%.

See our latest analysis for Changyuan Technology Group

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'd like to look at how Changyuan Technology Group has performed in the past in other metrics, you can view this free graph of Changyuan Technology Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Changyuan Technology Group Tell Us?

While the ROCE is still rather low for Changyuan Technology Group, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 38% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Changyuan Technology Group appears to been achieving more with less, since the business is using 49% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Changyuan Technology Group's ROCE

In a nutshell, we're pleased to see that Changyuan Technology Group has been able to generate higher returns from less capital. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 1 warning sign for Changyuan Technology Group you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.