Changgao Electric Group (SZSE:002452) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Changgao Electric Group (SZSE:002452) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Changgao Electric Group:

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

0.083 = CN¥208m ÷ (CN¥3.1b - CN¥602m) (Based on the trailing twelve months to March 2024).

Thus, Changgao Electric Group has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 6.0% generated by the Electrical industry, it's much better.

See our latest analysis for Changgao Electric Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changgao Electric Group's ROCE against it's prior returns. If you'd like to look at how Changgao Electric Group has performed in the past in other metrics, you can view this free graph of Changgao Electric Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Changgao Electric Group Tell Us?

The fact that Changgao Electric Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Changgao Electric Group is utilizing 78% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 19%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Changgao Electric Group's ROCE

To the delight of most shareholders, Changgao Electric Group 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 1 warning sign for Changgao Electric 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.

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